What the Fed is considering at its meeting

Tuesday, January 30, 2007; 12:44 PM

NEW YORK (Reuters) - Financial markets widely expect the U.S. Federal Reserve to hold benchmark interest rates steady on Wednesday, marking the fifth straight meeting it has stayed on hold after 17 increases that ended last June.

Markets will likely comb through the Fed's statement for insight into its policy outlook. Unexpectedly robust economic data have eased concerns of an economic downturn, prompting markets to scale back expectations for rate cuts this year.

In fact, some analysts are now predicting the Fed will raise rates later this year as a rebounding economy tightens demand and puts pressure on prices.

Federal funds futures contracts imply the likelihood of the Fed holding steady for most of 2007. Meanwhile, yields on benchmark 10-year Treasury bonds have risen above 4.8 percent from around 4.4 percent in early December.

Another focus may be whether the FOMC will decide by unanimous vote to keep rates steady, as four-time dissenter Richmond Federal Reserve Bank President Jeffrey Lacker will not be among the voting members this year in the annual rotation of voting regional Fed bank presidents.

Here are some factors that policy-makers are likely considering:

* Economic data for December was mostly robust, allaying concerns about some soft economic sectors.

* U.S. industrial production gained a stronger-than-expected 0.4 percent in December, showing output had held up late last year.

* New orders for U.S.-made durable goods rose 3.1 percent in December. Excluding volatile transportation orders, durable goods orders rose 2.3 percent in December following two monthly declines.

* New-home sales rose 4.8 percent in December to an annual pace of 1.12 million units.

* Labor market remained tight. The Labor Department said 167,000 jobs were created in December and also revised up hiring for each of the two preceding months. The unemployment rate in December was 4.5 percent, unchanged from November. December jobs data will be released on Friday, with a median forecast for an increase of 149,000 in non-farm payrolls.

* Core inflation remained tame, and oil prices briefly fell below $50 a barrel. Over the 12 months through November, the price index for personal consumption expenditures excluding food and energy eased to 2.2 percent, its lowest since May.

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