Washington, March 18:

Mixed signals on the US economy have put the Federal Reserve in a quandary as it tries to steer monetary policy amid fresh inflation concerns but also a slumping housing market, analysts say.

The central bank’s Federal Open Market Committee headed by Ben Bernanke is widely expected to hold its base interest rate steady at 5.25 per cent at a two-day meeting opening Tuesday.

The federal funds rate has been unchanged since August, when the Fed halted a string of 17 quarter-point increases. But policymakers have warned in the past few meetings that they are watching inflation and could hike rates again to keep prices in check.

The hotter-than-expected inflationary pressures have become evident with a stunning 1.3 per cent jump in February’s producer price index (PPI) and a 0.4 rise in the consumer price index (CPI).

This has disappointed those who have been waiting for Bernanke’s predicted “moderation” in inflation that could allow the Fed to cut rates to stimulate a sluggish economy. The latest inflation reports “do not permit the Fed to soften its stance on inflation risks, at least not yet,” said Stephen Gallagher, economist at Societe Generale.

“The Fed anticipates a reduction of inflation and over time we agree. The problem is that the decline is not fast enough to give the Fed maneuvering room at present.”

Gallagher said the FOMC meeting “should be an opportunity to repeat the status quo — no rate changes and a risk bias that inflation could be higher than expected.” Later this year, assuming inflation eases, Gallagher predicts the Fed will cut rates twice in 2007 for “insurance” against recession.

But some experts are abruptly reassessing their forecasts in the wake of the meltdown in the subprime mortgage sector, the riskiest part of the housing market, amid rising defaults in loans to people with poor credit histories.