Fed to maintain support for struggling economy

WASHINGTON (AFP) – The Federal Reserve is likely to stay on an aggressive course this week to support a struggling economy showing only tentative signs of recovery, analysts say.

Yet some argue that the Federal Open Market Committee, its two-day meeting is set to open in the next few hours, will be laying the groundwork to avoid a surge in inflation when the US economy does recovery.

This week's meeting is likely to signal no change in policy since its March gathering, when the Fed added over one trillion dollars to its arsenal to fight the economic crisis.

The FOMC statement due on Wednesday is expected to depict a weak economy that still needs extraordinary support, justifying its policy of near-zero interest rates and vast lending facilities to pump up credit availability.

"The Fed is likely in wait-and-see mode over the impact of the current program for at least the next month or so," said Sacha Tihanyi at Scotia Capital.

But Tihanyi said the market was mulling a report suggesting the Fed needed to pump in enough money into the system to equate to a base rate of minus 5.0 percent to support the economy,

"This does at least raise the specter of further unbridled monetary expansion at the Fed, as now an academic case can be made for such a policy extension," the analyst said.

Adolfo Laurenti, senior economist at Mesirow Financial said the Fed may acknowledge "green shoots" of recovery but not act on this.

"I don't think the Fed wants to create any excessive optimism," he said.

"I think the Fed is encouraged (by recent economic data) but it is too early to announce any turnaround."

Laurenti said the Fed led by chairman Ben Bernanke will be trying to manage expectations as financial markets await the impact of the central bank's massive stimulus effort.

The economist said the Fed must be ready with a plan to end the stimulus when the economy begins to recover, to avert a surge of inflation.

"Now is not the time to withdraw any stimulus," he said.

"At the same time they want to be ready with an exit strategy one year down the road. They do not want a return of inflation in another 12 to 15 months."

After its March 17-18 meeting, the Fed said it would buy up to 1.2 trillion dollars in government and agency debt in an effort to bring down a variety of interest rates it does not control.

Bernanke, who calls the effort "credit easing" instead of quantitative easing, nonetheless acknowledges the effort to effectively print vast amounts of money to help lift the economy out of its worst crisis in decades.

Peter Hooper, economist at Deutsche Bank, agrees that the Fed must look into the future to keep inflation in check after a recovery.

"Inflation risks remain very much to the upside for the longer term, and we expect that once the Fed does eventually begin to raise rates, it could move them up quickly," he said.

The US economy plummeted at a steep 6.3 percent pace in the fourth quarter of 2008 and it remains unclear whether the bottom has been hit.

The first official estimate for first quarter US output is due Wednesday, hours before the Fed concludes its meeting. Analysts expect gross domestic product to show a decline of 4.9 percent.