Interest Rates Not Expected to Budge

Federal Reserve Chairman Ben Bernanke on Wednesday will likely use his first-ever news conference on monetary policy to hammer home the case for a patient approach to withdrawing the central bank's extensive support for the U.S. economy.

He will face the press this afternoon at the end of a two-day policy meeting, the first time a Fed chairman has held a regularly scheduled news conference in the central bank's 97-year history.

Bernanke is expected to amplify the consensus view at the central bank that the economy still needs monetary policy support with near-zero interest rates and its purchases of more than $2 trillion in longer-term securities.

That consensus has been challenged by a number of hawkish Fed officials who worry the U.S. central bank might wait too long to raise interest rates from their 0 percent to 0.25 percent range, a historic low reached in December 2008, and to shed the assets it has bought.

Bernanke is expected to amplify the consensus view at the central bank that the economy still needs monetary policy support. That consensus has been challenged by a number of hawkish Fed officials who worry the U.S. central bank might wait too long to raise interest rates.

"The Fed is trying to walk a very fine line right now," said Julia Coronado of BNP Paribas. "So you will probably see the Fed speak about an improving economy and acknowledge rising energy prices without sounding too hawkish. The economy still needs the support of the Fed."

The Fed is lagging other central banks in tightening financial conditions. The European Central Bank raised benchmark rates earlier this month and China has also taken steps to cool its economy. However Japan has stuck to near-zero interest rates.

In contrast, the Fed's policy-setting Federal Open Market Committee, in a statement due at about 12:30 p.m., is expected to indicate it will pursue its $600 billion bond-buying program to its scheduled conclusion at the end of June. It is also expected to reiterate that it will keep interest rates unusually low for "an extended period."

The out-of-step U.S. monetary policy has undercut the dollar, which slid to a three-year low against a broad basket of currencies on Wednesday. Analysts expect the greenback to remain under pressure.

The Fed statement will be overshadowed by Bernanke's news conference at 2:15 p.m.

BERNANKE'S BALANCING ACT

Journalists are likely to press Bernanke to go beyond the central bank's pithy statement to offer more insight on when and how the Fed might begin to tighten policy.

The Fed chopped benchmark short-term rates to near zero in December 2008 and then bought $1.4 trillion in longer-term mortgage-related debt and Treasury securities to pull the economy out of a deep recession.

When the recovery flagged last year, the Fed launched its latest round of bond buying, also known as QE2 because it is the central bank's second installment of quantitative easing.

Fed officials known to voice consensus views -- such as Vice Chair Janet Yellen and New York Fed President William Dudley -- have defended the monetary support as important for an economy with unemployment at 8.8 percent.

Soft U.S. economic growth in the first quarter has offered a cautionary note for Fed officials, who will want to make sure the economy is on solid ground before pulling back on their stimulus.

Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., which oversees $1.2 trillion in assets, said he believes Bernanke will be conservative during his give and take with the media.

"While noting the continuing healing of the economy and higher headline inflation, the FOMC will maintain its commitment to a low policy rate, signal that QE2 will end in June as planned and reiterate that it stands ready to counter durable core inflationary pressures," he said.

"The FOMC will wish to avoid any significant sell-off in equities and further pressure on home prices," he added.

A government report on Wednesday showed stronger-than-expected orders for long-lasting manufactured goods, a sign the factory sector continues to underpin the recovery.

While Bernanke is unlikely to offer any timeline for rate hikes, he might provide insights into the latest thinking at the Fed on how officials will go about tightening policy.

Last year, he said the first step toward exiting would likely be a rate hike. However, recently some officials have urged that bonds be sold off first.

The central bank's statement is expected to suggest officials see the recovery on solid ground even though growth in the first quarter of the year was sluggish.

At the same time, the Fed is expected to restate concerns over the high level of unemployment and reiterate that upward pressure on inflation from surging commodity prices should prove fleeting.

This would give the Fed scope to continue to nurse the recovery with its easy monetary policy.