WASHINGTON, Sept 16 - Federal Reserve officials were expected to keep interest rates at 1958 lows when they meet on Tuesday and reiterate a willingness to keep rates down even in the face of stronger U.S. economic growth. While the U.S. recovery is picking up, it has yet to generate jobs and economists said that keeps alive the risk growth could falter once a temporary tax-cut boost fades. "Almost everything the Federal Reserve can hope to see in terms of leading indicators has turned positive," said Michael Swanson, a senior economist at Well Fargo Bank in Minneapolis. "The Fed's doing very well with one huge gaping exception, and that's the jobs area," he said.
The central bank's Federal Open Market Committee gathers at 9 a.m. (1300 GMT) to discuss interest-rate policy and is expected to issue a brief statement outlining its decision and view of the economy around 2:15 p.m. (1815 GMT). Analysts widely expect the Fed to hold the benchmark overnight lending rate steady at 1 percent, where it landed after a rate cut in June -- the 13th in a series of reductions dating back to early 2001. In addition, most economists expect the Fed to reiterate concern over the potential for already-low inflation to drift lower and restate the view it spelled out after its last meeting in August that low rates could be maintained "for a considerable period." "I think they will continue to nurse this economic recovery for quite some time," said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus. "I think they will work even harder tomorrow to put that message across in a clear and understandable fashion for financial markets to digest."
Some economists said the Fed would point to the protracted weakness in the jobs market as a way to underscore its commitment to a low-rate policy. Although the recession ended over 21 months ago, the economy continues to bleed jobs. In August, 93,000 workers lost their jobs bringing the total number of layoffs since the economy sank into recession to 2.8 million.
JOBLESSNESS HIGH, INFLATION LOW
Fed officials have said they are concerned a relatively high jobless rate and idle industrial capacity could lead to a downward drift in underlying inflation, which has already touched lows not seen since 1966. Economists said recent signs growth was accelerating -- from robust retail sales to rising demand for manufactured goods -- has no doubt lessened worries at the central bank that the economy could face a potentially debilitating deflation, a persistent decline in the overall level of consumer prices. At the same time, however, low inflation gives the Fed ample room to wait to ensure the pickup in growth proves lasting and begins to whittle away at unemployment and unused industrial capacity. By eliminating excess economic slack, officials hope to put a floor under inflation.
"In my view, the Federal Open Market Committee has little reason to undertake significant tightening so long as inflation remains low and promises to remain subdued," Fed Governor Ben Bernanke said earlier this month. While a small minority of economists think the recovery could falter and bring yet another rate cut, the vast majority see a sustained expansion and eventually higher rates.//