Federal Reserve could hold rates despite inflation woes

Washington: The US Federal Reserve 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.

The Fed's policy-setting Federal Open Market Committee resumed work on the second day of a two-day meeting, a Fed official said.

US policymakers 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 two 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 manoeuvre. While they have shown no inclination to lower rates further, they are still concerned about the economy's weakness.

Pressures

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.

"Given the uncertainty about both upside and downside risks, the Fed is likely to stay on hold indefinitely," Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna said in a note to clients.

A barometer of business investment, non-defence capital goods orders excluding aircraft, fell in May, but by less than expected, a government report yesterday showed.

Also, new orders for long-lasting manufactured goods were unchanged last month after two consecutive months of decline, data showed.

It still suggests that American companies are not a significant drag on the economy yet even though profits have been squeezed by rising costs," said Gary Thayer, an economist at Wachovia Securities in St. Louis.

Reports earlier this week showed a big drop in U.S. consumer sentiment in June and a continued slide in house prices, illustrating the continued risks to growth.