The Federal Reserve is expected to emphasize the U.S. economy's fragile state in a policy statement on Wednesday as it talks down expectations for a rate hike this year and holds fire on expanding asset purchases.
A statement outlining the Fed's thinking is due around 2:15 p.m. EDT at the conclusion of a regular two-day policy meeting. The Fed resumed its meeting on Wednesday at about 9 a.m., a Fed spokesman said.
Analysts widely expect that the U.S. central bank will hold the benchmark overnight federal funds rate between zero and 0.25 percent while emphasizing it will remain in this range for some time.
The Paris-based Organization for Economic Cooperation and Development recommended in its latest economic outlook on Wednesday that the Fed not raise rates before 2011 because conditions are so shaky.
Many U.S.-based economists agree that any increase in interest rates is a long way off.
With 'core' inflation beginning to moderate again, and legitimate threats to recovery still in evidence, officials have scant reason to turn hawkish, Morgan Stanley economist Richard Berner wrote in a note to clients.
U.S. core inflation, which excludes volatile food and energy costs, slowed to 1.8 percent year-on-year in May compared with 1.9 percent in April.
Fed officials have indicated that they would like to keep inflation close to, but under, 2 percent.
In addition, the U.S. economy is widely expected to have contracted further in the second quarter, albeit at a sharply slower rate of decline than the 5.7 percent annualized drop seen in the first three months of the year.
But with data increasingly suggesting the U.S. economy, stuck in recession for 18 months, is at least beginning to find its feet, financial markets have begun to toy with the idea the Fed could bump rates higher by the end of the year.
New orders for long-lasting U.S. manufactured goods rose by a better-than-expected 1.8 percent in May and mortgage applications climbed last week, reports showed on Wednesday, adding to signs the economy is stabilizing.
The Fed in its statement is expected to push back against the idea of a rate hike this year. Economists are focused on how the central bank's language could be tweaked to accomplish this tricky communication.
Economists at Goldman Sachs said one option would be for the Fed to say something along the lines of conditions are likely to warrant a federal funds rate in the current range for an extended period, ruling out modest hikes to 1 percent.
At the Fed's last meeting on April 28-29, it said conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The Goldman economists said their suggestion would offer a clearer signal.
Either way, officials may be wary of offering too explicit a commitment. In 2003-04, they vowed to hold rates low for a considerable period, and kept rates at a 1 percent for a year -- a stretch which many economists say helped inflate the housing bubble.
We're not calling for an exact repeat of the 'considerable period' ... but we wouldn't be surprised to see the Fed use a similar phrase that becomes part of the financial lexicon for the balance of 2009 and the first half of 2010, said Michael Darda, chief economist at MKM Partners.
The Fed is not expected to ramp up asset purchases above an existing promise to buy $300 billion of longer-dated U.S. government bonds and $1.45 trillion of mortgage debt, although it might make some minor changes.
Policy-makers launched those programs to drive down mortgage rates and other market-set borrowing costs. While officials worry about the economy's weakness, they are also concerned expanding purchases further might spark concern their aggressive actions will eventually fuel inflation.
Some analysts say the Fed could instead stretch out its buying of longer-dated Treasuries, or possibly divert cash now earmarked for mortgage debt to purchase government bonds. Its current plans have it wrapping up its buying of Treasury securities by mid-September while the mortgage asset purchases would run until year-end.