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THE Fed appears to have a preferred recovery path. Early in the crisis, the Fed cut rates to near-zero and initiated a policy of security purchases designed to boost the economy. By last 2009 and early 2010, the Fed's messaging switched to discussing exit strategies, signalling that it was comfortable with the trajectory it was forecasting at the time. When actual economic conditions underperformed that trajectory in the summer of 2010, the Fed acted again to move the economy back toward its preferred path.

The Fed's latest economic projections are at right. As you can see, the outlook as somewhat better than it was in November. Growth this year is projected to be much stronger than was previously forecast. The unemployment and inflation forecasts also look better, though not by as much as real GDP growth.

Some analysts will focus on this improvement from November and make guesses about the Fed's commitment to QE2. That's probably not the best way to get a sense of the situation. One would do better to compare current forecasts to those in January of 2010, at which point the Fed was talking about exit.

So, take a look at the range for 2012 unemployment: 7.6% to 8.1%. When the Fed was preparing to tighten, it was forecasting 2012 unemployment of 6.6% to 7.5%, a much stronger labour market than is currently projected. What about inflation? The Fed sees a 2012 core inflation rate of 1.0% to 1.5% as being likely. In January of last year, by contrast, it expected a core inflation rate in 2012 of 1.2% to 1.9%.

So what does this tell us? Well, both measures indicate that the economy is not yet on a path consistent with a move toward Fed tightening. But note, the inflation gap is smaller than the unemployment rate gap. The difference could be due to concern that the natural rate of unemployment has risen, such that inflation pressures in labour markets build earlier than the Fed thought a year ago.

The Fed is going to be watching labour market data very closely to see if the Beveridge curve is showing any signs of a troublesome rise in structural unemployment. Wouldn't it be nice if the Senate would go ahead and approve the Nobel prize-winning economist and Beveridge curve expert nominated to the Fed Board of Governors?