Fed Takes Economy's Pulse At 2-Day Meeting

Wednesday, June 27th 2007, 7:07 am

By: News On 6

WASHINGTON (AP) _ Keeping inflation under control as the economy emerges from a yearlong sluggish spell is certain to be a matter of lively debate for Federal Reserve policymakers.

Fed Chairman Ben Bernanke and his central bank colleagues open a two-day meeting Wednesday, where the economy's current and future performance will be assessed. The strength of the anticipated economic rebound, the depth of the housing slump, problems with risky mortgages, the state of the employment climate, and the direction of gasoline and other energy prices will figure prominently into those discussions.

When it wraps up its meeting Thursday, the Fed is widely expected to hold a key interest rate at 5.25 percent, where it has stood for a year. Given that expectation, Wall Street investors, economists and others are keenly interested in the Fed's assessment of economic conditions and what that might mean for possible rates moves in the future.

For now, many economists believe the Fed will leave rates where they are for the rest of this year.

``The Fed for the next six to nine months will walk softly and carry a big stick. You'll hear them talk up the detriments of higher inflation. But I seriously doubt they'll change policy,'' said Richard Yamarone, economist at Argus Research.

The economy, which barely moved at a 0.6 percent growth rate in the first three months of this year, is believed to be rebounding at a pace of around 3 percent or better, according to some economists' estimates. The Fed doesn't want to see the economic pickup lift inflation, too.

While overall inflation has gone up in recent months mostly because of higher energy costs, underlying, or core, inflation has shown some improvements.

Core inflation _ excluding food and energy prices _ rose 2 percent over the 12 months ending in April. That was down from March's 2.1 percent annual increase. Economists predicted underlying inflation should dip below 2 percent for the 12 months ending in May when the government reports Friday.

``I think the Fed is probably fairly cautiously optimistic about the economy. But the risks are still weighted toward inflation not moderating as much as the Fed would like,'' said Mark Vitner, economist at Wachovia.