World News Engine: Fed Reserve approaches crossroads as growth slows

Fed Reserve approaches crossroads as growth slows

It's decision time for the Federal Reserve.

The central bank's top policy panel will convene in Washington on Tuesday and Wednesday to decide if the recovery can make-do with less Fed help.

Concretely, the seven men and three women who vote on the Fed's rate-setting panel will have to choose whether or not to extend a $600 billion stimulus plan that is scheduled to end in June.

Until recently the choice had appeared pretty straightforward. Growth was picking up nicely and the recovery was, in the Fed's own words, "on a firmer footing."

But amid higher oil prices and government spending cuts, the economy now appears to be slowing.

The Federal Open Market Committee itself is expected to lower its growth forecasts during the meeting.

"We expect a modest downgrade," said Goldman Sachs economist Sven Jari Stehn.

Economists are also worried that consumer prices could be ticking upward, crimping consumer spending and further putting the recovery at risk.

Americans have seen the price of gasoline rise over eight percent in the last month and the average gallon now costs 35 percent more than it did a year ago.

That has left the Fed with a tough choice between potentially pulling the plug on the recovery or continuing spending, which risks fuelling inflation that could quickly spill out of control.

Most economists expect the central bank to slowly pull away from their crisis-era policies, and allow the purchases to end.

After a failed attempt last year to normalise policies, the Fed is now expected to roll back two years of exceptionally loose monetary policy very cautiously.

"The FOMC will opt to go slowly in reversing policy accommodation, especially after last year's failed attempt to wean the economy off monetary stimulus," said Steven Ricchiuto, chief economist of Mizuho Securities US.

Ricchiuto predicted the Fed would not spend any more than the $600 billion already committed, but would reinvest when the bond or other purchases mature, keeping the level of stimulus in the economy steady for at least three months.

Whatever happens Fed chairman Ben Bernanke will get a chance to explain the decision when he appears for the Fed's first-ever post-meeting news conference.

But with billions of dollars riding on Bernanke's comments, the first conference is expected to be a cautious affair.

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