Federal Reserve sticks to late 2014 rate hike time frame

The U.S. Federal Reserve on Wednesday repeated its promise to leave interest rates on hold until at least late 2014 but offered few clues into whether it might offer additional stimulus later this year.

The Fed described the economy as expanding moderately, just as it did in March, and said the unemployment rate had declined but remains elevated.

Officials noted a pick up in inflation but said it was largely attributable to energy cost hikes that will affect price growth only temporarily.

Economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the central bank said in its policy statement.

Richmond Fed President Jeffrey Lacker again dissented against the decision, saying he believed rates would need to be raised before that time frame.

As Fed officials gathered on Wednesday, the government reported that orders for long-lasting manufactured goods plunged 4.2 per cent in March, the biggest drop since the economy was nose-diving in early 2009.

The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.

Investors wishing for clues about how the central bank views the June end-date of Operation Twist, its latest effort to keep down long-term rates, were disappointed.

U.S. economic growth has been just firm enough to weaken the case for additional stimulus through Fed purchases of government or mortgage bonds. Gross domestic product expanded at a 3 per cent annual rate in the fourth quarter but is seen slowing to around a 2.5 per cent pace in the first three months of this year.

The Fed will release its latest round of quarterly forecasts at 2 p.m. (1800 GMT) and Fed Chairman Ben Bernanke will follow with a news conference at 2:15 p.m. (1815 GMT), where he will likely be peppered with questions on the chances of more easing.

Most analysts think Bernanke will do whatever he can to keep his options open.

Since the central bank's last round of GDP, unemployment and inflation forecasts in January, the U.S. jobless rate has come down to 8.2 per cent from 8.5 per cent, and the financial situation in Europe has stabilized somewhat, although it is still troubling.

In January, the Fed saw the economy growing between 2.2 per cent and 2.7 per cent. That range may be revised a bit higher. At the same time, the unemployment rate forecast will likely shift down from January's 8.2 per cent to 8.5 per cent range.

Policymakers will also offer individual projections for when the first interest rate increase should come and how quickly borrowing costs should rise - though these will appear on charts that do not link them to specific officials' names.

Traders are currently betting the Fed will begin raising rates in April 2014, with short-term U.S. futures contracts suggesting they see a 56 percent chance of a rate hike then.

In response to the deepest recession in generations, the Fed lowered benchmark overnight rates effectively to zero in December 2008 and more than tripled its balance sheet by purchasing some $2.3 trillion in government and mortgage bonds to keep long-term borrowing costs down.

According to a Reuters poll published last week, economists have dialed down expectations for a third round of bond purchases. The respondents saw a 30 per cent chance of more bond buys, down from 33 per cent in a poll in March.

A report early this month that showed job growth slowed sharply in March kept some hope of easing alive, and economists will look eagerly to the next round of jobs data on May 4 for more clues on where U.S. monetary policy may be heading.

Copyright @Thomson Reuters 2012