Fed to shed light on policy

The Federal Reserve is expected to break new ground this week by providing a clearer window into official thinking on monetary policy and is expected to signal that interest rates will be held near zero into 2014.

Outside of words, however, the central bank, which opened a two-day meeting on Tuesday, appears unlikely to take any action to prop up the economy.

When the meeting concludes on Wednesday, the Fed for the first time will release policymaker projections for the path of benchmark U.S. interest rates and views on when the first rate hike should occur.

In what would amount to another historic shift, it may also announce an agreed target for inflation, which would likely be in the 1.7 to 2 percent range that the majority of Fed officials have already said is desirable.

It's a pretty momentous meeting, said Jeremy Lawson, chief U.S. economist for BNP Paribas in New York.

The Fed cut the overnight federal funds rate to near zero in December 2008 and has bought $2.3 trillion in bonds in a further effort to spur stronger economic growth.

It has also vowed to hold rates ultra-low until at least mid-2013. The new rate projections are expected to show that most Fed officials now don't see them rising until 2014.

It's a significant innovation, Lawson said of the decision to publish the interest rate views of the Fed's 17 policymakers. It will change the interaction between the Fed and the markets and the way people think about how the Fed is likely to behave.

Fed officials began their meeting at 10 a.m. EST, a Fed spokesperson said. A policy statement is due at 12:30 p.m. (1730 GMT) on Wednesday, and that will be followed by a news conference by Fed Chairman Ben Bernanke and the publication of policymakers' quarterly forecasts.

The U.S. economy strengthened toward the end of last year, and the unemployment rate dropped to a near three-year low of 8.5 percent in December.

However, the recovery is not expected to retain all of its momentum and Europe's debt crisis still poses a risk.

Some Fed officials have said further bond purchases might be warranted given a still sluggish recovery but the central bank is likely to bide its time to see whether the stronger growth at the end of 2011 was more than a one-quarter wonder.

In addition to the new interest-rate projections, officials may also agree on a statement of their longer-run goals and policy strategy that could set out an explicit inflation target.

Adopting an inflation target would cap a long-running campaign for Bernanke, who has for years advocated doing so as a fundamental central banking best practice.

An explicit target could hold down inflation fears if the central bank feels it needs to deliver a further boost to the recovery in the event it wobbles.

(Reporting By Mark Felsenthal; Editing by Neil Stempleman and James Dalgleish)