WASHINGTON, June 25 (Reuters): The US Federal Reserve Wednesday is expected to hold interest rates steady and indicate slightly greater unease on inflation, while stopping well short of signalling higher borrowing costs are imminent.
A statement from the Fed's policy-setting Federal Open Market Committee outlining its decision and thinking on the economy is due around 2:15pm EDT.
US policy-makers face a deepening housing decline that looks like it will be a drag on economic growth for months to come, even as surging oil and commodity prices threaten to ignite broader inflation.
The Fed lowered the interbank federal funds rate to 2 per cent at its last meeting on April 29-30 and has suggested it hopes rate reductions totalling 3.25 percentage points since mid-September will be enough to help the economy rebound from the housing downturn and a credit crunch.
Fed officials have little room to maneuver. While they have shown no inclination to lower rates further, they are still concerned about the economy's weakness. At the same time, they are worried that steep increases in food and energy costs could begin to exert upward pressure on a wider range of prices.
Reports showed Tuesday a big drop in US consumer sentiment in June and a continued downward slide in house prices, illustrating the continued risks to growth.
At the same time, news that the largest US chemical maker, Dow Chemical Co, would raise prices by as much as 25 per cent and that mining titan Rio Tinto had secured a deal with China's largest steel maker to nearly double the price Rio gets for iron ore raised the specter of inflation.
Analysts expect the US central bank's statement to reflect the view expressed recently by Fed Chairman Ben Bernanke that the economy appears to have skirted a deep recession.
With risks of a deep downturn fading, Bernanke and Vice Chairman Donald Kohn have ratcheted up their warnings about the risk of inflation in recent weeks, emphasising their resolution that expectations for higher inflation do not build. Any unmooring of inflation expectations could trigger a harmful spiral of rising prices and wages, they cautioned.
Analysts expect a nod to those inflation worries, but said the Fed would be very careful how it characterises its concerns to avoid feeding market expectations that a rate-raising cycle is about to start.
Meanwhile, former Federal Reserve Chairman Alan Greenspan warned Tuesday the US economy was on the brink of a recession, with the chances of that happening at more than 50 per cent.
The US economy has been hit by a credit crisis which began in the sub-prime mortgage market, prompting a series of interest rate cuts to help boost the economy. But price pressures are growing, making more rate cuts unlikely.
Asked if the US economy was in recession, Greenspan said: "We are on the brink."
A quick recovery was unlikely, he said via video link to a conference in Johannesburg. "A rebound at this stage is not something I think is in the immediate outlook," he said.
