WASHINGTON, Oct 28 - Federal Reserve officials will gather to consider interest rates on Tuesday amid expectations they will keep them at 1958 lows as they seek to ensure that already weak inflation does not fall further. While numerous signs have emerged suggesting a robust U.S. economic recovery has at last begun to take hold, businesses have shown a remarkable ability to increase production without hiring new workers. Economists say the weak job market and plenty of unused industrial capacity are keeping alive the risk that the underlying rate of inflation, already at 37-year lows, could move even lower. "I think they want to see an actual acceleration of inflation not just stabilization ... before they would even start thinking about hiking interest rates," said Sung Won Sohn, chief economist at Wells Fargo. A poll of 2O bond trading firms last week showed economists unanimous in the view that the Fed would hold the benchmark overnight lending rate at a 45-year low of 1 percent. The firms were also nearly unanimous in expecting the Fed to reiterate that concern over slowing inflation was foremost in its thinking.
The Fed is expected to announce its interest rate decision around 2:15 p.m. EDT. (1915 GMT). Policy-makers at the central bank have said they have grown more confident that the recovery is a lasting one and job creation likely lies around the bend. But they have offered no signal they are ready to shift from their low-rate stance.
UNUSUAL VOW
Inflation is now as low as Fed officials want it to go. Over the 12 months through September, the core Consumer Price Index, which strips out volatile food and energy prices, rose just 1.2 percent -- a full percentage point less than the year-ago rate. While policy-makers say the risk of deflation -- a persistent drop in the overall level of consumer prices -- is remote, they want to keep a positive inflation buffer so they can respond to potential economic weakness quickly, without risking a slide in prices. With ample slack in the economy, Fed officials have been unusually clear that they are willing to bide their time before raising borrowing costs. After the last two policy meetings in August and September, the Fed said rates could be kept low "for a considerable period" -- a pledge most economists expect to hear repeated when the latest meeting draws to a close. One of the main reasons the Fed can afford to wait is the rapid growth in productivity, or worker output per hour, which has let firms to hold off on hiring while raising output. Former Fed governor Laurence Meyer said the acceleration in productivity has made it more difficult to guess when the central bank will eventually start bumping rates higher. While his firm Macroeconomic Advisers does not see a rate rise until January 2005, some market participants think the Fed could start moving rates higher next spring.
"We have to understand that there is a higher element of uncertainty because we don't really fully understand why productivity growth has been as high as it has been and therefore we can't be so confident about how long it's going to stay high," he said. The stronger productivity growth, the faster the economy would need to grow to generate jobs. Analysts say the Fed wants to see strong, sustained employment gains before it would feel comfortable raising borrowing costs.//www.reuters.com