The Federal Reserve is expected to leave rates near zero on Wednesday and repeat its vow to keep them there for a long time, even as Chairman Ben Bernanke looked set to clinch a second term despite vocal opposition.
Fed officials say they are focused on developing an exit strategy from an unprecedented dose of monetary stimulus the central bank delivered to counter the worst financial crisis since the Great Depression.
Nonetheless, the central bank will almost certainly reiterate its commitment to keeping interest rates at rock bottom lows for an "extended period," particularly given jittery financial markets and a spotty economic recovery.
"We expect no change in the funds rate, no change to the scheduled alterations of the balance sheet, and no fundamental change to the language committing the Fed to keeping the funds rate ‘exceptionally low’ for an extended period," said Maury Harris, economist at UBS.
Weak holiday retail sales and further setbacks in housing has dampened talk of any immediate rush for the doors. Instead, policy-makers will continue to debate the merit of various tools that might be used to drain credit from the banking system.
The Fed gathers amid a firestorm in Washington over Ben Bernanke’s nomination to a second term as Fed chairman. Once expected to sail through the Senate, his confirmation vote ran into some resistance last week by key Democrats, sending Wall Street, which strongly backs the chairman, sharply lower.
Politics aside, investors are curious about whether the Fed will soon raise the discount rate it charges banks for emergency loans, and will hunt the statement for clues to that effect. Such a move is not expected on Wednesday.
Financial markets, which took a drubbing last week, have since stabilized as Bernanke’s confirmation began looking more certain. The latest Reuters tally showed 46 out of 100 senators were likely to vote for Bernanke, while 19 vowed to vote against him and the rest remain undecided. The vote is expected at the end of the week.
Bernanke’s term officially expires on January 31, at which point Vice Chairman Donald Kohn would likely take over if the vote has not yet gone through.
