Fed seen holding rates steady as inflation watch continues

Tue Jul 26, 2016 1:28pm EDT
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By Ann Saphir

SAN FRANCISCO (Reuters) - The U.S. Federal Reserve is expected to keep interest rates unchanged this week, deferring any possible increase until September or December, as policymakers hold out for more evidence of a pickup in inflation.

Central to the debate at the Fed's July 26-27 policy meeting will be how to reconcile upbeat U.S. economic data, highlighted by strong job gains in June, with a global growth slowdown and other headwinds threatening the inflation trajectory.

For San Francisco Fed President John Williams, one of the 17 members participating in the central bank's rate-setting deliberations, all that is needed is a bit more confidence that inflation is indeed headed toward the Fed's 2 percent target.

The inflation measure the Fed prefers to track is currently at 1.6 percent.

With monthly job gains well above the level needed to prevent an uptick in unemployment, and no signs of a rise in productivity, some Fed policymakers are likely to argue for a quick increase in rates to avoid a surge in inflation.

"That is the danger – and you can be sure that the hawks are going to be arguing that," said Alan Blinder, a Princeton University professor and a former Fed vice chairman. "I have a hunch that they will talking in July about September."

Other policymakers, like influential New York Fed President William Dudley, have signaled they would rather wait for more tangible signs of a rise in inflation before pulling the trigger on a rate increase.

"There's not a lot of reason to raise rates until inflation goes up," said Kevin Logan, chief U.S. economist at HSBC in New York.   Continued...

The United States Federal Reserve Board building is shown in Washington October 28, 2014.   REUTERS/Gary Cameron