The U.S. Federal Reserve looks certain to hold interest rates steady when it meets this week and will likely restate worries on inflation, even while nodding to weak growth and an easing of price pressures.
The central bank has held benchmark overnight borrowing costs steady at 5.25% for six consecutive meetings stretching back to August. It will announce its decision on rates around 2:15 p.m. New York time on Wednesday.
The statement from the rate-setting Federal Open Market Committee after its last meeting on March 20-21 was notable for dropping the bank's explicit bias toward higher rates, a move seen by some as a baby step toward a cut later in 2007.
It also said, however, that its "predominant policy concern" was the risk inflation would not ease, and meeting minutes released a few weeks later showed the Fed had not really altered its views on the risks to inflation and growth.
Analysts believe the central bank will want more time to assess whether a softer pace of economic growth will lead inflation lower as they hope, and that it will once again leave its options open on the future direction of monetary policy.
"Bet on a Fed still on hold in May with their inflation bias intact, but with a somewhat softer view of current economic and inflation trends," said Scott Anderson, senior economist at Wells Fargo in Minneapolis.
"Flexibility on rates either on the upside or downside will remain of paramount importance."
Interest-rate futures, which are used as a measuring stick for potential Fed moves, show almost no chance the FOMC will cut rates by mid-year, and prospects for an ease in August are less than one-in-five.
The final major piece of data policy-makers will pore over at their one-day meeting came on Friday with a report on April nonfarm payroll growth.
That report showed a slowdown in jobs growth, with only a modest 88,000 new positions created, and a tick upward in the unemployment rate to a still-low 4.5%.
While a touch weaker than many had expected, most economists said the report was not dismal enough to knock the Fed from its anti-inflation perch.
"This data will tend to reinforce the prospect of an FOMC statement that is little changed from March," said Alan Ruskin, chief international strategist at Greenwich Capital Markets in Greenwich, Connecticut.
Others, however, noted it was the slimmest payroll gain since November 2004 and that a government survey of households released along with the data from employers showed a drop in employment of 468,000, suggesting overall weakness in the economy may have finally crept into the labor market.
"This report is a perfect set-up for the Fed to adopt a truly neutral policy stance at next week's meeting to replace the half-baked inflation bias that caused so much confusion in March," said Chris Low, chief economist at FTN Financial in New York. "The reality of the past six months is not only falling inflation but also dramatically weaker economic growth."
Economic Data Is Mixed
The government's first snapshot of first-quarter growth released on April 27 showed the economy expanded at an anemic 1.3% annual rate, the smallest gain in four years.
Still, just when some were counting the economy out, the Institute for Supply Management said last week its index of national factory activity rose to 54.7 in April, the highest since May 2006, suggesting one of the economy's weakest spots was beginning to revive.
Fed officials have stuck to forecasts for growth to bounce back by year-end, but some have acknowledged greater risks flowing from, among other things, the weak housing sector.
"News pertaining to the first quarter has been disappointing, and has raised the downside risk for growth," San Francisco Federal Reserve Bank President Janet Yellen said on April 26.
While growth has been soft, inflation -- in the Fed's view -- has been stubbornly high, although recent price data provided some good news.
The 12-month gain in the so-called core PCE price index, the Fed's preferred gauge of nonfood, nonenergy costs, eased unexpectedly to 2.1% in March, tantalizingly close to the top of the 1% to 2% "comfort zone" often cited by policy-makers.
But between rising energy prices and the still-tight jobs market, the inflation dragon has arguably not been slain.
"Despite the apparent respite in core inflation, it is too early to let our guard down," said Adolfo Laurenti, associate economist at LaSalle Bank in Chicago.