The Federal Reserve on Wednesday is expected to reaffirm its intention to keep U.S. interest rates at ultra-low levels for a long time to support the economy, even as signs of recovery accumulate.

The Fed's policy-setting Federal Open Market Committee resumed a two-day meeting at about 9 a.m. (1400 GMT), a Fed spokesperson said. The Fed will issue a statement around 2:15 p.m. (1915 GMT).

The central bank cut overnight rates close to zero percent last December and it has vowed to keep them there for an extended period. While some analysts think the Fed could start to tip-toe away from that pledge, most say it is too soon.

Once they start removing that, that's a real sign that they intend, within six months, to start raising rates, said Deutsche Bank economist Torsten Slok. But it's just premature, looking at the economic numbers, to arrive at that conclusion.

Analysts expect the Fed to nod to modestly encouraging signs suggesting the economy is gaining strength, but still expect a cautious tone on policy.

A private report on Wednesday showing U.S. companies cut payrolls at the slowest pace in more than a year may add to a sense that the economic numbers are moving in the right direction.

The government on Friday is expected to report that the decline in employment is abating, though the jobless rate is forecast to rise to a fresh 26-year-high of 9.9 percent.

ECONOMY'S STAMINA IN DOUBT

Policymakers will need to take into account the economy's faster-than-expected 3.5 percent annualized growth rate in the third quarter, which effectively signaled the end of the most painful recession since the 1930s.

Suggesting further momentum, data on Monday showed manufacturing activity hit its highest level in 3-1/2 years last month, though a report on Wednesday showed the nation's vast services sector was growing only modestly.

Improved third-quarter corporate earnings have also fed optimism that the upturn can be sustained next year even after government help has dried up.

In an act underlining rising confidence in the recovery, billionaire investor Warren Buffett on Tuesday said his company, Berkshire Hathaway Inc, agreed to purchase the nation's largest rail company, saying it is poised to benefit from the recovery.

Fed officials in recent weeks, however, have sent the message that while the outlook has improved, the recovery is likely to be sluggish and needs continuing support.

Unemployment is expected to climb into next year, damping the consumer spending that accounts for around 70 percent of U.S. output. The banking system is still under pressure from loan losses, and credit remains tight.

We have to think about our exit policy and are looking at it very carefully, but at the moment, that's not our first order of concern. At the moment, it's policy accommodation, Chicago Federal Reserve Bank President Charles Evans, a voter on the Fed's policy-setting panel, said on October 22.

INFLATION NOT A WORRY NOW

Evans' comments reflect a debate among Fed officials about whether the greater worry for policymakers should be sluggish growth or risks the Fed's aggressive actions could trigger inflation as recovery takes hold.

Many officials point to high unemployment and mothballed factories as evidence of substantial slack in the U.S. economy that could keep inflation, by some measures at its lowest in years, at bay.

Most analysts at top U.S. banks expect the Fed to keep interest rates on hold until mid-2010 or later, although interest rate futures markets are pricing in an increase earlier in 2010.

Even before it raises rates, the Fed is expected to begin to withdraw some of the enormous amounts of cash it pumped into the economy to lift growth after chopping rates to near zero. That withdrawal of liquidity from the financial system is seen as key to containing inflation risks.

Other central banks are also wrestling with how best to spur growth and when to withdraw extraordinary measures to support their economies.

The European Central Bank is expected to keep rates on hold at a record-low 1 percent on Thursday, while there is a good chance the Bank of England will expand its large asset purchase program at a meeting the same day.

(Editing by Andrea Ricci)

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