WASHINGTON (AFP) - US Federal Reserve policymakers, widely expected to hike interest rates, struggled to find words to reassure financial markets that the economy is strong enough to withstand the higher rates.
The Federal Open Market Committee (FOMC) was expected to raise the federal funds rate to 1.75 percent, making the third quarter-point increase since June for the central bank and its chairman Alan Greenspan.
Analysts said even more important than the rate move, which has been telegraphed in advance, is the working of the FOMC statement, which will provide clues about the Fed's economic outlook and its future rate actions.
"The outcome of today's meeting seems to be pretty much a done deal," said Morgan Stanley analyst David Greenlaw.
"Fed officials have signaled that they will remain on a gradual tightening path over the near term, so the markets are fully priced for an anticipated 25 basis point hike in the Fed Funds target rate to 1.75 percent. The only real uncertainty involves the language in the official statement."
Greenlaw said he sees "some minor tweaking" of the description of labor market conditions and the inflation picture, but no change to the Fed's neutral assessment of the "risks" -- which suggests whether the Fed is leaning toward rate hikes to fight inflation or cuts to boost growth.
"We suspect that Greenspan and Co. will retain the optimistic forward-looking reference that first appeared in the August statement ... Any notable change to this portion of the statement would be a surprise since it could signal rising cautiousness inside the Fed."
Banc of America Securities said the futures market has priced in a 98 percent chance of a quarter point increase Tuesday and a 71 percent likelihood of another move November 10.
But Merrill Lynch economist David Rosenberg said the central bank, which is trying to normalize monetary policy after a period of extraordinarily low rates -- may be forced to pause in its efforts sometime soon, dismissing the notion of a quarter-point rate hike at each meeting through 2005.
"Forecasters who see the need for the Fed to move to 'neutral' in a hurry don't take into account that Alan Greenspan has traditionally been very pro-growth," Rosenberg said.
Additionally, he said weaker-than-expected economic data must force policymakers to think hard about the rate-hike plan, especially with inflation subsiding.
"In the past month, we saw all 10 major economic indicators come in below consensus expectations," he said, adding that the bond market -- which effectively forecasts future interest rates -- bringing rates lower.
"The market isn't buying into this economic revival story," he said.