US Fed expected to hold low interest rates

Date: 27-04-2010

The US Federal Reserve is expected to keep ultra-low borrowing rates when it meets Tuesday and Wednesday, with the need to bolster the economic recovery again trumping inflation concerns.

The 10 members of the board, including Chairman Ben Bernanke, will discuss whether or not to raise its main interest rate from the zero-to-0.25-percent range where they have been since December 2008.

The historically low rates are seen as crucial to support the economic recovery -- keeping borrowing costs low and fueling spending.

Investors will be closely watching to see if the Fed repeats its long-standing promise to keep exceptionally low rates "for an extended period."

Any shift in the language could be seen as heralding tighter monetary policy that could tame investors appetite for risk.

Analysts said they expected interest rates to stay the same and the Fed's language to remain largely unchanged, even if it describes improvements in the economic outlook.

"We expect the 'extended period' language to remain, possibly with a bit more conditionality and the economic assessment to be upgraded," Deutsche Bank told clients on Monday.

If the Fed sounds more upbeat on the recovery's prospects, after a slew of positive indicators about the state of the housing and labor markets, it is likely to be seen as moving closer to a policy change.

At the Fed's last rate-setting meeting it said "economic activity has continued to strengthen and that the labor market is stabilizing" -- a more upbeat description than the phrasing used after its previous policy meeting in January.

Any mention of a low risk of inflation could signaling that a shift in policy is more imminent.

But no matter what the Fed says on Wednesday, there are few who believe that rates will not be raised sooner or later.

"Everyone knows a slow tightening of monetary policy will be coming," said Rich Nelson of Allendale Inc, an Illinois-based market research firm.

But a debate continues to rage within the Fed over the pace of tightening, and when the Fed should offload trillions of dollars in assets.

According to minutes of the Fed's last rate meeting, members mulled its exit strategy from massive economic support measures but have put off any decision.

"The committee is likely to recognize both the stronger growth and lower inflation data. A discussion of eventual asset sales is also likely, although we do not expect such sales anytime soon," said Goldman Sachs analysts.

Some members fear that the loose monetary policy could cause pent up inflation.

"Low interest rates and/or large Fed asset holdings might foster a new asset bubble, whose bursting might cause another recession," Goldman said.

But adding that "there is little to no evidence that this is actually happening."