|Ben Bernanke, chairman of the Federal Reserve|
WASHINGTON ( TheStreet) -- The Federal Reserve is not expected to make any change to the federal funds rate's current level of zero to 0.25% in its announcement Tuesday afternoon, but investors may be hesitant to make any major moves before that time. Fed Chairman Ben Bernanke has made it clear that the market will be given ample warning ahead of the decision to raise rates. As recently as last week,
Chicago Fed President Charles Evans said that accommodative rates will likely be needed for "some time" and added that the Federal open Market Committee will keep the target rate low for the next three to four meetings. Although the Fed's most recent beige book , which the FOMC will use as a reference at its March 16 meeting, acknowledged modest improvements that were more widespread than previous reports, weakness has persisted in the housing and jobs markets.
UBS economists recently extended their expectations for increases to the federal funds rate, which they now project to start three months later than initially forecast, and at a slower pace. UBS economist Maury Harris notes the Fed seemed "somewhat less hawkish than we earlier expected." "Instead of beginning to raise the federal funds rate at mid-year, the Fed now is expected to start signaling subsequent fed funds rate tightening by mid-year, with actual tightening not commencing until the end of 2010's third quarter," Harris writes in a recent note. "Our new fed funds rate scenario results in a year-end 2010 federal funds rate of 0.5% vs. our earlier 1% projection. By the end of 2011, instead of a 3% fed funds rate, we now expect a fed funds rate at 2% -- an approximately 0.5% real (inflation-adjusted) fed funds rate," Harris adds. Regarding the FOMC statement, Harris anticipates hearing increased confidence in the recovery, but also expects continued signals for gradual policy tightening. "While we expect no change in rates and a repeat of the policy guidance prescribing exceptionally low rates for an extended period, we do expect several changes to the FOMC statement: Acknowledgement of further improvement in current conditions and the outlook; some talk on plans for programs to neutralize excess reserves; and some phrasing -- such as Fed Chairman Bernanke used recently -- that qualifies the guidance on low policy rates for an extended period," Harris says. The statement will be released Tuesday at 2:15 p.m. ET. -- Written by Melinda Peer in New York.