Fed seen maintaining promise to keep rates low

By Mark Felsenthal

WASHINGTON (BestGrowthStock) – The Federal Reserve is expected on Wednesday to repeat its vow to keep interest rates at rock bottom levels for “an extended period” while acknowledging that the U.S. economic recovery is getting stronger.

A flare up of financial turmoil in Europe, caused by concerns that Greece and Portugal might default on debt, should reinforce the Fed’s reluctance to close out a two-day meeting with any sign that might suggest U.S. monetary policy could soon be tightened.

The Fed cut benchmark overnight rates to near zero in December 2008 and in March last year promised “exceptionally low” rates for “an extended period,” a vow it has renewed at every meeting since that one.

While the world’s biggest economy is crawling out of its deepest recession in decades, Fed officials have said the recovery remains wobbly and they have warned that the jobless rate is likely to remain uncomfortably high for a long time.

The Fed is expected to announce its policy decision at around 2:15 p.m.

Recent signs suggesting the recovery was strengthening may provoke lively discussion at the meeting about whether the time to drop the low-rate pledge from the central bank’s post-meeting statement is drawing near.

Data released on Tuesday showed that house prices rose on an annual basis for the first time in more than three years in February and that U.S. consumer confidence rose to a 1-1/2 year high in April.

Other reports have shown stronger retail sales and factory activity, and hiring by U.S. employers in March at the fastest rate in three years. However, inflation has been negligible.

“The recovery is likely to be seen as broadening out geographically as well among industry groups, while the inflation data highlight the risk of deflation taking root in the economy,” said Steven Ricchiuto, an economist with Mizuho Securities USA Inc in New York.

Some Fed officials are worried that the hundreds of billions of dollars they pumped into the economy after running out of rate-cutting room could spur a bout of inflation as the recovery gains ground. These policy-makers have pressed for the Fed to begin selling some of those securities.

However, with the Fed’s buying spree recently ended, the central bank is not expected to signal any immediate turn-around.

Kansas City Federal Reserve Bank President Thomas Hoenig is likely to dissent for the third time this year against keeping the “extended period” vow in place. Hoenig has argued the recovery is strong enough that the Fed should preserve flexibility to quickly move away from ultra-easy money.

However, Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn have made clear that with the U.S. unemployment rate holding at 9.7 percent for three months in a row, and with inflation not a problem, there is no need to rush to tighten monetary policy.

Financial companies that trade securities directly with the Fed generally do not see the first Fed rate hike coming until the last three months of the year.

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(Reporting by Mark Felsenthal)

Fed seen maintaining promise to keep rates low