POLL: Fed seen on hold in Aug, slight chance of Sept hike

By Tamawa Kadoya

NEW YORK (Reuters) - Wall Street economists largely expect the U.S. Federal Reserve to keep short-term interest rates on hold in coming months, and most don't expect rates to start rising until mid-next year despite the Fed's increased concern about inflation, according to a Reuters poll.

The survey, taken shortly after the Fed left interest rates steady on Wednesday, as widely expected, showed all 16 primary dealers polled expect the Fed to stand pat at its next rate-setting meeting on August 5.

"They don't want people to think they are not worried about inflation, but in the end in today's statement they are balanced," said Jim O'Sullivan, U.S. economist with UBS in Stamford, Connecticut.

"If they were seriously planning on raising rates at the next meeting in August, you would have a clearer tilt in today's statement."

Such expectations contrast sharply with the Fed's European counterpart, which is seen raising rates in July and whose leadership has turned up the rhetoric on inflation.

European Central Bank President Jean-Claude Trichet repeated on Wednesday that the ECB could raise rates at its next meeting to make sure inflation expectations stayed in check.

The disparate direction of interest rates between the Fed and the ECB prompted the U.S. dollar to fall to two-week lows versus the euro on Wednesday.

The poll showed 14 dealers expect U.S. rates to remain on hold in September while two firms expect a quarter percentage point increase.

Wall Street primary dealers -- banks that deal directly with the central bank -- also put the median forecast for fed funds at 2 percent at the end of the year, where it currently sits.

The Fed kept key short-term interest rates steady on Wednesday for the first time since it began a rapid easing cycle last September, where it cut the benchmark lending rate by a total of 3.25 percentage points.

In its statement, the Fed said: "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."

Interest rate futures on Wednesday showed a 33 percent chance that the Fed will raise rates in August, down from 48 percent earlier in the day. A rate increase is still fully priced by the September FOMC meeting.

"The Fed's statement was slightly less hawkish than market players expected," said Eric Green, economist at Countrywide Financial in Calabasas, California. "They may talk inflation, but they won't act immediately as they are still concerned about growth."

(Additional reporting by Pam Niimi, Chris Reese, John Parry, Burton Frierson, Pedro Nicolaci da Costa, Steven C. Johnson, Lucia Mutikani and Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)