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Doubts grow about mid-year rate hike, but Fed won’t express any

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Federal Reserve Chairwoman Janet Yellen may not show her cards on interest-rate-hike timing.

While there are growing doubts among economists that the Federal Reserve will make their first hike in short-term interest rates in June, don’t look for the U.S. central bank to give any hints that it may hold stay a little while longer than expected.

The Federal Open Market Committee will meet for two days beginning Tuesday to set monetary policy for the next six weeks and will release a statement at 2 p.m. on Wednesday. There will be no press conference.

“We think the FOMC will be reluctant to make changes to the statement that might influence expectations for Fed action, particularly when there is no press conference to explain any ‘meaningful’ additions or deletions to the text,” said Michelle Girard, chief U.S. economist at RBS Securities, in a note to clients. Economists at RBS, Goldman Sachs and Wrightson ICAP have pushed their forecast for the first Fed move from June to September.

“Policymakers don’t seem ready to admit defeat on a mid-year hike just yet,” added Ellen Zentner, economist at Morgan Stanley, in a research note.

To be sure, most economists are sticking with forecast of a June rate hike, according to the latest Blue Chip survey, possibly because that’s what many Fed officials have signaled in the past.

Skeptics that the Fed will be able to move in June think the outlook for inflation will be the key.

They believe that low oil prices and the strong dollar are likely to put downward pressure on inflation for most of the year. The core reading of the Fed’s favorite inflation gauge, the personal consumption expenditure index, edged down to a 1.4% annual rate in November. Although the Fed sets its 2% inflation target on headline inflation, which includes food and energy, the core measure is seen as more important for the timing of the Fed liftoff given that it strips out the low energy prices.

Economists who think the Fed will move in June think that the healthy labor market will outweigh concerns about foreign developments or a stronger dollarDXY, -0.43% . The unemployment rate fell to 5.6% in December, its lowest level since May 2008, and down from 6.7% in December 2013.

As has become the norm in meeting without Fed Chairwoman Janet Yellen meeting reporters, the focus will be on the language of the policy statement.

Economists don’t expect the Fed to make many changes. Despite all the drama in global central banking, from the Swiss National Bank ending their policy of buying up euros, the European Central Bank’s new bond-buying program and the Bank of Canada rate cut, the “basic contours of the U.S. policy outlook have not changed much,” said Lou Crandall, chief economist at Wrightson.

“The overall message will be that the FOMC expects to begin the normalization process later in 2015, but without any commitment to a specific time frame for the lift-off,” said Ward McCarthy, chief financial economist at Jefferies.

The Fed will say again that it “can be patient” in beginning to hike rates.

Other changes aren’t seen as necessary. In December, the Fed said the economy was expanding at a moderate pace and that although it expected inflation to increase once transitory factors of lower energy prices dissipated, it would watch developments closely.

And so if the Fed makes any changes to the language, they’ll be widely seen as hints about policy.

According to BNP Paribas, any new language pointing to a stronger labor market would support lift-off in June. Any mention of foreign developments, the dollar or very low inflation “would challenge it.”

The Fed policy committee in 2015 is seen as a little bit more dovish than last year’s committee. Two strong hawks, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher are rotating off the committee and only one, Richmond Fed Jeffrey Lacker, will replace them. Analysts think that the impact on policy will be minimal as Yellen remains “in the driver’s seat,” according to RBS.

Greg Robb