WASHINGTON, Sept 23 (Reuters) - The U.S. Federal Reserve is expected to take note of an improving economy at the close of a meeting on Wednesday, while cautioning that high unemployment puts the recovery at risk.
The Fed is widely expected to hold overnight lending rates at close to zero and repeat its intention to keep rates exceptionally low for an extended period in a statement the Fed will issue around 2:15 p.m. (1815 GMT), after the central bank’s two-day policy meeting draws to a close.
The meeting resumed at about 9 a.m. (1300 GMT), a Fed spokesperson said.
It is also expected to keep its massive financial support for the economy in place, although it may offer a suggestion of how it plans to withdraw that underpinning.
“Officials think that recovery is far from assured, that inflation may still decline from current levels, and that it’s early days yet for the healing in the financial system and markets,” Morgan Stanley economist Richard Berner wrote in a research note.
The U.S. central bank may come to a decision on the fate of a program under which it has pledged to buy up to $1.45 trillion of mortgage-related securities by year end to drive down mortgage costs and support the economy.
While many analysts expect the Fed will stretch out these purchases into next year to allow for a tapering off that could ease financial market adjustments, some think it has the luxury of putting off any decision until later this year.
At least one Fed official has raised the question of whether the central bank should even move ahead with all the planned purchases; others believe the bar should be set high for curtailing actions markets already expect.
The Fed meets against a backdrop of an economy that is returning to health more rapidly than most expected after a wrenching recession and the most painful financial crisis since the Great Depression.
A slew of recent data points to turnarounds in manufacturing, housing markets, and business and consumer confidence, putting the prospect of a sharp recovery back on the table for policy-makers seeking to forecast the outlook.
Stock markets have rallied since hitting a trough in March, and the blue chip Dow Jones industrial average has gained around 550 points, or about 6 percent, since the Fed’s last meeting in mid-August.
Still, with unemployment at a 26-year high of 9.7 percent and projected to go higher, central bank officials have made clear they aren’t popping champagne corks.
“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Fed Chairman Ben Bernanke said last week.
While the economy is widely expected to return to solid growth in the current quarter, the Fed and many private economists warn that the recovery could falter as stimulative government spending and tax cut measures wear off.
The debate at the central bank will revolve around whether inflation or deflation, a widespread drop in prices that could spawn a vicious cycle and hobble the economy, is a greater risk going forward.
Some officials are deeply concerned that a more than doubling of the Fed’s balance sheet to over $2 trillion will be dangerous tinder for inflation once the recovery heats up. Those officials want the Fed to begin paring the assets it has accumulated sooner rather than later.
Others worry a persistently high jobless rate will keep consumers wary and threaten the recovery. With so many out of work and with factories operating well below capacity, the economy can gain steam for a while before inflation is a threat, those officials believe.
“The Fed will move gradually and cautiously in reducing its balance sheet next year even as there are further signs of a sustained economic recovery,” UBS Securities economist Maury Harris wrote in a research note.
Even so, the Fed is likely to clearly signal that it has a well thought-out exit strategy in place from its unprecedented monetary stimulus to reassure financial markets it is committed to keeping inflation in check.
