Fed seen holding U.S. rates for now, leaving door open for June hike

Tue Mar 15, 2016 5:28pm EDT
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By Ann Saphir

SAN FRANCISCO (Reuters) - U.S. Federal Reserve policymakers are seen leaving short-term interest rates unchanged at a two-day policy meeting that began Tuesday, but also to signal that a rate hike is not too far off as long as the job market and inflation continue to improve.

The meeting began at 1 p.m. EDT (1700 GMT), a Fed spokesperson said in an email. The Fed is due to issue a statement at the conclusion of the meeting on Wednesday at 2 p.m. EDT (1800 GMT), and Fed Chair Janet Yellen will hold a news conference at 2:30 p.m.

The U.S. central bank lifted borrowing costs in December for the first time in nearly a decade, but uncertainty over the impact on the U.S. economy of slower growth in China and Europe since the beginning of the year has driven policymakers to hold off on any further rate hikes since then.

A recent string of stronger U.S. data, including faster-than-expected job growth in February, has eased fears in the past few weeks that headwinds from abroad, and the tighter financial conditions they sparked at home, could derail the recovery.

"The most prominent risk in January - the tightening in financial conditions at the start of the year - has receded," wrote Goldman Sachs economists Zach Pandl and Jan Hatzius. "As a result, Chair Yellen will likely indicate that the committee remains on track to raise rates again next quarter."

Still, the path to a next rate hike is unlikely to be smooth. U.S. retail sales were reported on Tuesday to have been weaker than thought in January, renewing worries over domestic growth prospects, even as the Bank of Japan offered a gloomier outlook for the world's third-biggest economy without immediately adding to stimulus.

Fresh forecasts from the Fed's 17 officials released after the meeting ends on Wednesday will likely signal three or possibly two rate hikes this year, a slower path of rate hikes than the four 2016 rate hikes envisioned in December, the last time forecasts were published.

The expected downgrade may largely reflect the Fed's decision in January to put policy on hold for the time being, rather than new worries over the U.S. or global outlook.   Continued...

Snow covers the grounds of the U.S. Federal Reserve in Washington January 26, 2016.  REUTERS/Jonathan Ernst