Federal Reserve seeks finely tuned message to ward off inflation

 The Federal Open Market Committee set to announce a decision on Wednesday is widely expected to hold the federal funds rate steady at 2.0 percent.

The U.S. central bank headed by Chairman Ben Bernanke finds itself in a tough spot, with the U.S. economy teetering on the brink of recession, but signs of price pressures are heating up dangerously.

The central bank has slashed rates since last September by 3.25 percentage points in an effort to reignite growth, but officials are signaling that the cycle of cuts is probably over and that inflation is now the biggest threat.

Joseph LaVorgna, senior economist at Deutsche Bank, said the language of the Fed statement will be under close scrutiny.

"In light of recent hawkish comments from various policymakers, the focus will be on the tone of the official meeting statement and a possible shift in the balance of risks," he told the AFP.

"We expect the recently accentuated inflation concerns among policymakers to be more formally noted in the official rhetoric, thereby striking a slightly more hawkish tone. However, we do not believe the Fed will go so far as to adopt an explicit tightening bias."

Many analysts say the U.S. economy is still too fragile to be able to absorb higher interest rates amid a horrific housing slump, high oil prices and tight credit conditions.

'DANGEROUS GAME'

While Bernanke's warning that the Fed will "strongly resist" a jump in inflation, expectations led traders to bet on a rate increase, economists are more skeptical.

All 101 in a Bloomberg News survey said the Federal Open Market Committee will keep the benchmark rate unchanged tomorrow and most analysts this month predicted officials will stand pat until 2009.

"That's the dangerous game," Bloomberg quoted Scott Anderson, senior economist in Minneapolis at Wells Fargo & Co., the fourth- largest U.S. bank by market value, as saying.

"Instead of putting the shot across the bow on inflation," Bernanke might have "held off a few more months to let the credit crisis heal a little bit more."

A spate of anti-inflation rhetoric by Fed officials earlier this month heightened speculation of a near-term rate rise.

Interest-rate futures on Monday morning had fully priced in a quarter-percentage point rise in the overnight federal funds rate in September, according to Reuters data. But many economists expect the central bank to keep its powder dry through the end of the year.