Fed starts meeting, seen confirming rates on hold

By Alister Bull
WASHINGTON (Reuters) - The Federal Reserve began a two-day meeting on Tuesday at which it is expected to dampen expectations for interest rate hikes this year, while holding steady on its plans for asset purchases.
A Fed official said the meeting got under way at around 1 p.m. A statement announcing the policy decision is expected at about 2:15 p.m. on Wednesday.
Economists widely expect the Fed to hold its target for the federal funds rate, the rate banks charge each other for overnight loans, in the zero to 0.25 percent range reached in December.
The meeting comes at a difficult juncture for the Fed and its chairman, Ben Bernanke.
Hints the economy is nearing recovery have some market participants arguing the Fed must act soon to prevent inflation from taking hold by withdrawing the extraordinary stimulus it has put in place. Others see a risk of a plunge back into a deep recession if emergency efforts are removed too soon.
President Barack Obama said on Tuesday that Bernanke had done a good job since the start of the financial crisis, but gave no hint whether he wants him to carry on when his term ends in January.
Bernanke's Fed has put in place an unprecedented array of emergency programs to fight the crisis, including large-scale purchases of mortgage debt and longer-dated U.S. government bonds.
At its June meeting, the Fed is not expected to ramp up asset purchases above an existing promise to buy $300 billion in government bonds and $1.45 trillion of mortgage debt.
It may, however, stretch out its buying of U.S. Treasury debt to last until year-end, or divert cash now earmarked for mortgage-related debt to government bonds.
Goldman Sachs economists expect the Fed to slow its purchases of longer-dated U.S. Treasuries to $5 billion a week from a current average around $13 billion to make the program last for the rest of the year.
One reason it may stop short of ramping up the actual amount of Treasuries it plans to purchase is worry among some policy-makers about inflation.
Fed officials are sensitive to accusations that it is 'monetizing' U.S. debt by printing money to purchase government bonds, which critics claim could lead to a problematic outbreak of inflation. It is a charge Bernanke has denied.
"An unchanged $300 billion program would make it easier to maintain this position because it would keep the Fed's total holdings of Treasuries just below pre-crisis levels," Goldman Sachs wrote in a note to clients.
The Fed subsequently ran down these holdings as it sold billions of dollars of Treasuries last year to sterilize the balance-sheet impact of other asset purchases it made to ease credit markets in the middle of a financial panic.
But the Fed is expected to push back against speculation that it will raise rates before the end of the year, and economists were focused on how the language of its policy statement could be tweaked to accomplish this tricky mission. Continued...
Source: Reuters