WASHINGTON – U.S. Federal Reserve officials were universally expected to decide on Wednesday to keep interest rates steady but could heighten a warning on inflation to make clear they will raise rates again if needed.
The policy-setting Federal Open Market Committee resumed meeting for a second day at 9 a.m. (1300 GMT) and was to announce a decision at about 2:15 p.m. (1815 GMT).
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Financial markets were calm ahead of the decision, with U.S. stock futures buoyed by strong earnings, as investors evidently were betting heavily on no change in rates.
Keeping the bellwether federal funds rate at 5.25 percent would extend the pause policy-makers initiated on August 8 after a more than two-year cycle of 17 straight quarter-point increases.
Economists have noted signs of economic slowing since early August that appear to justify the rate halt. But the tenor of policy-makers' comments on inflation has led to questions on whether the next rate move, when it happens, will be up or down.
"The odds favor a gradual reduction in core inflation over the next year or so," Fed Vice Chairman Donald Kohn said three weeks ago. But "important upside risks to the outlook for inflation warrant continued vigilance on the part of the central bank."
The remarks by Kohn, who served as former Fed Chairman Alan Greenspan's chief strategist and is regarded as market-savvy on a heavily academic Fed board, set a tone that helped nip a perception that the only future direction for rates was down.
Already, one FOMC member — Richmond Federal Reserve Bank President Jeffrey Lacker — has taken the relatively rare step of dissenting at the past two meetings in August and September from the majority opinion to keep rates on hold.
Lacker felt rate rises were needed to tamp inflation pressures down more rapidly.
In addition, Fed staff revised down estimates of the economy's noninflationary potential in forecasts outlined at FOMC meetings in August and September, which has caught the attention of financial markets by implying a greater slowdown than previously thought may be needed to ease price pressures.
WARY ON PRICES
Minutes from the September meeting issued on October 11 showed policy-makers were "quite concerned" about inflation and also about the possibility their own credibility could be brought into question if inflation did not recede as they hoped.
Ben Bernanke, who took over as Fed chairman on February 1, said in a question-and-answer session after an address earlier this month the inflation rate "is still above what we would consider price stability" and pledged the central bank stood prepared to act if needed.
"We do believe inflation is going to come down gradually over time, but it's something we have to watch very carefully to make sure that it doesn't rise or even remain where it is," Bernanke said.
The U.S. consumer price index, excluding food and energy, rose at a 3 percent annual rate in the first nine months this year, well above the 2.2 percent posted for all of 2005 and outside the generally perceived 1 percent to 2 percent "comfort zone" for policy-makers.
Federal funds futures contracts have crossed out hopes for a series of rate cuts next year and now see some chance borrowing costs could move up as early as the first quarter.
One reason appears to be that economic growth, while slowing, remains resilient enough in the face of costlier energy and falling house prices to keep inflation worries alive.
U.S. Treasury Secretary Henry Paulson said in a radio interview on Tuesday that surging stock prices offset some concern about home prices, which could potentially fuel spending and keep price pressures alive.
The two-day FOMC meeting was to allow time to debate a push by Bernanke for the Fed to become more open, or at least to mull options up to and including adopting a target for inflation to guide the U.S. central bank's decision-making.
Any decisions are expected well into the future and some FOMC members, like Kohn who is not an inflation targeter, left no doubt the discussions on more openness were in the early stages.
"We'll begin to talk about whether there are some ways to better anchor expectations without putting ourself in a straitjacket," Kohn said during the summer.
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