Fed seen in no hurry to raise rates

A man walks in front of the U.S. Federal Reserve building in Washington, June 24, 2009.

NEW YORK (Reuters) - The Federal Reserve meets this week against an improving economic backdrop, but with inflation not an imminent threat, the U.S. central bank is seen as in no hurry to raise interest rates.

Economists expect the policy-setting Federal Open Market Committee to hold the target range for overnight interest rates steady at zero to 0.25 percent until at least 2010.

A statement outlining the Fed's policy decision is expected at around 2:15 p.m. EDT on Wednesday, at the end of a two-day meeting.

Fed Chairman Ben Bernanke said earlier this month that the worst U.S. recession since the Great Depression was "very likely" over, but that the recovery would be slow and would take time to create new jobs.

Below is some recent data the Fed will consider:

ECONOMY

There have been signs of economic recovery in data released since the Fed's last policy meeting on August 11-12.

- An index measuring the U.S. economy's prospects rose for a fifth straight month in August to a 1-1/2 year high as stock prices surged, data from private research group The Conference Board showed on Wednesday.

- Retail sales climbed 2.7 percent in July, the biggest monthly advance since January 2006, the Commerce Department said.

- The preliminary September Reuters/University of Michigan Surveys of Consumers sentiment index rose to 70.2, the highest since June.

- The New York Federal Reserve Bank's "Empire State" business conditions index, which gauges manufacturing activity in New York State, rose to 18.88 in September, the highest level since November 2007. The survey is one of the earliest monthly guideposts to U.S. factory conditions.

But the positive news was by no means across-the-board: the U.S. unemployment rate hit a 26-year high of 9.7 percent last month.

Housing data has been mixed, suggesting some stability in the hard-hit sector but no firm revival.

In August, U.S. housing starts and permits for future building hit their highest level since November. The data reflected a rebound in multifamily homebuilding activity, though groundbreaking for single-family homes fell 3 percent.

While economists generally agree an economic recovery is underway, many continue to question its sustainability given its current reliance on monetary and fiscal stimulus measures.

INFLATION

U.S. consumer price measures continue to point to muted inflation pressures.

Stripping out volatile energy and food prices, the closely watched core measure of consumer inflation rose 0.1 percent in August after rising 0.1 percent in July. Compared to August last year, the core inflation rate was up just 1.4 percent, the smallest 12-month rise since February 2004.

"Since the FOMC last met in August, the inflation data has not changed very much. However, (the FOMC's) assessment that it began the second paragraph of its August statement with, 'the prices of energy and other commodities have risen of late,' seems somewhat less true. Commodity prices are more mixed," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, wrote in a note to clients.

UNCONVENTIONAL TOOLS

The Fed is expected to taper off its mortgage-related securities purchases -- one of the unusual policy measures it took to fight the recession -- by extending the time-frame of two programs beyond their expiration at end of the year.

The idea would be to avoid any disruption to markets caused by bringing the programs to a quick halt.

The Fed has said it would buy up to $1.25 trillion of mortgage-backed securities and $200 billion of housing agency debt. So far, it has bought $862 billion of MBS and $125 billion of agency debt.

"Fed communications seem pretty clear that the committee has more or less agreed that the MBS and agency debt programs should be tapered off," said Michael Feroli, an economist at JPMorgan.