Fed seen holding rates steady as growth stumbles

By Mark Felsenthal

WASHINGTON (Reuters) - The U.S. Federal Reserve on Tuesday is expected to hold interest rates steady as dismal housing markets and tight credit weigh on the economy, while it signals lingering inflation concerns despite lower oil prices.

A statement from the Fed's policy-setting Federal Open Market Committee outlining its decision and thinking on the economy is due around 2:15 p.m. (7:15 p.m. British time).

Facing the highest U.S. unemployment rate in four years and the lowest existing-home sales pace since early 1998, policy-makers will be more downbeat about the growth outlook than they were in June, when they said saw risks tapering off.

"The mention in the last statement that downside growth risks appeared 'to have diminished somewhat' now looks like a premature conclusion," JPMorgan economist Michael Feroli wrote in a note to clients.

The Fed held the interbank fed funds rate steady at 2 percent at its last meeting June 24-25, and has suggested it hopes rate reductions totalling 3.25 percentage points since mid-September will be enough to help the economy rebound.

While growth in gross domestic product growth in the April-June period was a relatively strong 1.9 percent, many economists expect activity in the latter half of the year to weaken as consumer spending spurred by government stimulus checks fades.

In addition, signs that growth in economies around the world may be slowing is an ominous sign for U.S. exports, which have been one of the few areas of strength.

The Fed must also factor continuing credit strains into its outlook. A weakened banking sector continues to tighten lending, suggesting that credit will not be available to support the economy in months ahead.