The U.S. Federal Reserve Board is an institution haunted by mistakes of the past.
Tragically naive in its reading of economic conditions ahead of the financial crisis, the Fed now is noticeably reluctant to read too much into several months' worth of positive indicators.
Fed chairman Ben Bernanke's recent assessments of the strength of the recovery put him squarely at the glum end of the spectrum. And even though the United States clearly has momentum, many central bankers continue to insist that further monetary stimulus remains an option.
With factory production strong and jobless claims at their lowest levels since before the recession, Fed officials still saw fit last week to leak information to The Wall Street Journal about planning for a potential third go at creating hundreds of billions of dollars to purchase financial assets.
The disconnect between a dour central bank and equity investors who have pushed the Standard & Poor's 500 stock index higher for four consecutive weeks is causing a certain amount of cognitive dissonance among analysts. They will be watching closely for a shift in the Fed's take on the economy after the policy committee concludes its second meeting of the year on Tuesday.
At least a subtle change in tone seems necessary. The Labour Department reported Friday that the U.S. economy created more than 200,000 jobs for a third-consecutive month in February, only the fourth such streak in the past 10 years. The agreement of Greece's private creditors last week to accept losses on their bonds has reduced the risk of further turmoil in Europe.
Yet it's far from clear whether these factors will be enough to ease the troubled minds of the majority of the Fed's key officials.
In January, the policy committee described the economy as "growing moderately," and noted that the unemployment rate remained elevated despite "some further improvement in labour market conditions."
The unemployment rate was unchanged at 8.3 per cent in February, still a long way from 5.5 per cent, which is roughly the rate the Fed judges to be consistent with an economy that is growing at its potential. The U.S. economy has some 5 million fewer jobs today than it did four years ago, even as the population has grown.
When Mr. Bernanke tells audiences that the labour market is far from normal, as he did two weeks ago during testimony on Capitol Hill, this is what he means. Since the Fed is mandated to achieve "maximum employment," and inflation remains muted, there is little reason to expect the Fed to roll back any of its stimulus measures any time soon.
In January, policy makers said they likely would leave interest rates extremely low until at least the end of 2014 – unprecedented clarity.
The question now is whether the Fed will do more. Less than two months removed from its extraordinary interest-rate announcement in January, it's highly unlikely the Fed will propose new measures this week.
However, the decision to leak details of how the Fed could further stoke the economy without fuelling inflationary pressures gives analysts something to talk about ahead of the Federal Open Market Committee meeting.
The critics were generally unimpressed. While a future stimulus program is possible, it won't be "validated in any way" this week, economists at Toronto-Dominion Bank said in an advisory note for clients on Friday. "There is no press conference, there is no place for it in the statement, and there is no need to do so given the state of the economy," they wrote.