The US central bank is expected to hold interest rates steady for the third straight month when it meets on Tuesday and Wednesday and repeat warnings on inflation, even though economists see little chance it will hike again.
The Federal Reserve will probably make only minor changes to the statement accompanying its decision to maintain rates at 5.25 percent, retaining a tightening bias to keep inflation expectations at bay while slower growth saps price pressures. "The Fed wants to talk like a hawk and walk like a dove," said Josh Stiles, senior strategist at IDEA in New York.
Policy-makers say they think price pressures will moderate as slower growth creates a bit more slack in the economy. On the other hand, recent data have not given them much incentive to change their anti-inflation rhetoric, even if some of them privately don't see the risks to inflation as high.
September's core consumer price index, which strips out energy and food prices, rose 0.2 percent from August, soothing fears it might have been higher. But it is still running near to 3 percent on a yearly basis, well above the 1 percent to 2 percent comfort zone voiced by a number of Fed policymakers.
"The action paragraph in the statement will stay the same ... maintaining the bias to tightening," said former Fed Governor Lyle Gramley. He did not see this anxiety over prices translating into higher interest rates, at a time when the US economy is coping with a cooling housing market. "The Fed is going to be patient. ... It is a soft economy and one in which you certainly would not want to be aggressive in fighting inflation," he said.
The first reading of the performance of the US economy in the third quarter is due Friday and is forecast by Wall Street analysts to show growth slowing to a 2.2 percent annual pace from 2.6 percent in the previous three months.
Weaker growth and falling energy prices ought curb core prices. However, the Fed will continue to keep warning of risks to this outlook to make sure that expectations for future inflation remain in check.
"Most policy-makers probably believe that they can sit on the sidelines for quite some time. But they have decided to emphasise concerns about inflation," said James Glassman, senior economist at J.P. Morgan Chase in New York.
This strategy has helped to temper bets in financial futures markets that the Fed will cut rates at the start of next year, although dealers polled by Reuters do still forecast a move to 5.0 percent on the federal funds rate target in second quarter of 2007.
At the same time, yields on 10-year US Treasury notes have crept up somewhat since the last Fed meeting, on September 20, tightening financing conditions a touch. St. Louis Federal Reserve Bank President William Poole, who will vote in next week's meeting, told reporters in Memphis on Monday that higher bond yields could do part of the Fed's job for it in restraining inflation.
Another regional president, Jeffrey Lacker of the Richmond Fed Bank, dissented at the last two policy meetings in favour of another quarter-point hike to ensure inflation falls at a fast enough pace. In a speech on October 11 he said central bankers would be "quite vigilant" on inflation, which some observers took to be a fractional softening in his concerns on prices, hinting he would fall back into line with his FOMC colleagues next week.
The last time a member of the FOMC dissented more than twice in succession was in 1998, when then Cleveland Fed Bank President Jerry Jordan dissented four straight times because he believed higher interest rates were warranted.