Fed meeting starts on day of global market turmoil

The U.S. Federal Reserve opened a two-day meeting on Tuesday that is widely expected to end with a decision to leave interest rates on hold near zero and a fresh commitment to keep them there for an extended period.

The central bank's gathering was taking place against the backdrop of increasing financial market turmoil in Europe, which should only serve to reinforce the Fed's reluctance to signal any near-term inclination to tighten policy.

It doesn't look like that extended period wording is going to come out, said Jonathan Basile, economist at Credit Suisse in New York, referring to the Fed's policy statement due at around 2:15 p.m. (1815 GMT) on Wednesday.

The statement should, however, contain a nod to an improving economic backdrop.

The U.S. economy has been growing since the middle of last year. U.S. gross domestic product rose at a 5.6 percent annual rate in the last three months of 2009, and is forecast to have risen at a 3.4 percent pace in the first quarter of this year.

The meeting began on a turbulent day for stock markets, which were down sharply around the world after rating agency Standard & Poor's downgraded both Greece and Portugal, raising fears of contagion in the continent.

While the overseas developments are unlikely to affect the Fed's policy changes in the near-term, officials have flagged the possibility that a worsening of the crisis would create risks for U.S. banks and the broader economy.

Since the Fed's last meeting in mid-March, U.S. economic data has been pointing to an increasingly firmer industrial recovery. At the same time, the labor market, a big factor in the Fed's decision-making, continues to languish.

In response to a severe financial crisis, the Fed not only slashed interest rates effectively to zero, but also undertook a host of emergency measures to soothe troubled credit markets, including extensive purchases of mortgage debt from the banks.

Many of the emergency lending facilities have been allowed to expire, but the housing assets still sit on the Fed's balance sheet, raising concern among some experts that loose monetary conditions could eventually spark inflation.

The meeting is expected to include some discussion of how an eventual program of asset sales might work, though top officials, including Fed Chairman Ben Bernanke, have signaled they are inclined to turn to such sales only as a last resort.

Instead, Bernanke has suggested the Fed will initially tighten policy by draining reserves from the banking system, and then by raising the interest it pays on bank reserves.