Fed sees soft economic landing, end to rate increases

WASHINGTON, Mar 20 (Reuters) U.S. Federal Reserve officials are set to raise interest rates later this month, but expect the economy to settle into a sustainable pace without borrowing costs going much higher, recent comments from policy-makers suggest.

The U.S. central bank has increased benchmark overnight rates at each of its past 14 policy meetings dating to June 2004, pushing them to 4.5 per cent from a bargain 1 per cent.

While another quarter-point boost is seen as certain at the March 27-28 meeting of the rate-setting Federal Open Market Committee -- the first to be led by new Fed Chairman Ben Bernanke -- officials have made it clear they are less sure what the future will bring.

Fed policy-makers have said rates appear close to where they need to be given the economic outlook, suggesting that the 20-month tightening campaign is nearing an end.

But they have also have warned that much depends on incoming economic data, and that some further tightening might be appropriate.

''It was a lot easier for the last 20 months to know which way we were going and even the pace at which we were going,'' Atlanta Federal Reserve Bank President Jack Guynn said last week. ''We're about at a point now, I say 'about' ... where there are uncertainties on both sides.'' While a number of officials, including Guynn, think the risks of heightened inflation and slower growth are roughly in balance, they see little slack in the economy and do not appear ready to hang up their inflation-fighting spurs just yet.

''I consider us to be in a range where further moves depend on how the data transpires, but I don't see weakness out there yet,'' San Francisco Fed chief Janet Yellen said last week.

TILTED TOWARD TIGHTENING After growing at a sluggish 1.8 per cent rate in the fourth quarter, the U.S. economy entered the new year firing on all cylinders as warm weather brought shoppers out in droves. Some economists expect first-quarter growth to top 5 per cent.

As Fed officials await data to confirm forecasts for a slower pace of growth later this year, they appear likely to once again signal a willingness to raise rates further in the months ahead.

The U.S. jobless rate is at a historically low 4.8 per cent while the amount of untapped industrial capacity has dwindled to levels not seen in more than five years, factors Fed officials think could contribute to inflation if their forecasts of slower growth prove short of the mark.

The tough decision on exactly when to bring the rate rise campaign to a close falls to a good degree on the shoulders of Bernanke, who took over from long-time Fed chief Alan Greenspan on Feb. 1.

HOUSE CLEANING In a congressional appearance last month, Bernanke warned of the dangers of the U.S. economy overshooting its sustainable path. He will have an opportunity to offer his latest thoughts on Monday when he speaks before the Economic Club of New York.

But interest rates are not the only matter of business Bernanke will confront at his first meeting as chairman.

The two-day session will give policy-makers an opportunity to address a number of institutional matters, including their communications policy -- a subject that has been taking up more and more of their normally half-day gatherings.

At its January meeting, the policy committee agreed to take up the question of ''the relationship between its formal vote and the policy statement issued after each meeting.'' Currently, the committee's vote encompasses both the rate decision and a portion of the Fed's post-meeting statement about the outlook for the economy and future rate moves.

But at a time when what the Fed says can have as much sway over market behaviour as the rate decision itself, some officials may want more say over the entire statement, which also describes their view of the current economy and some of the risks that it faces.

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