The Federal Reserve has announced that it will keep its super-low short-term interest rate unchanged and will persist with its plan to purchase government bonds in a strategy known as "quantitative easing." While the Fed's decision was expected, it will probably prove controversial. 

Why? First, the Fed claimed that "economic recovery is on a firmer footing" and that the labor market is improving gradually, in a more optimistic assessment than the one it issued during its last meeting in January. But the declaration may appear jarring given current events, as unrest in Libya sends the price of oil soaring and the earthquake and nuclear crisis concerns in Japan spook stock markets, threatening consumer spending and hiring. In fact, the Fed made no mention of Japan in its statement. But Reuters notes that the current market uncertainty gave the Fed a reason to make a "steady-as-she-goes policy decision" and maintain its "ultra-loose monetary policy."

Second, the Fed rejected the notion that rising commodity prices signal sustained inflation, noting that the effects of higher food and energy prices appear to be "transitory." The Fed added that it would keep an eye on inflation, but that may not satisfy critics who claim quantitative easing is tempting inflation or  those who believe inflationary pressures may not be temporary. As Reuters explains, "despite high unemployment, rising energy costs appear to be nudging up the price expectations of U.S. consumers, the first inklings of an inflationary psychology the Fed would like avoid."

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Uri Friedman