SAN FRANCISCO (Reuters) – The Federal Reserve won’t raise interest rates this week, but will likely make clear that as long as U.S. inflation and jobs continue to strengthen, economic weakness overseas won’t stop rates from rising fairly soon.

That will be a big change from the last time the Fed met, when uncertainty over the impact of slower growth in China and Europe drove policymakers to signal it would stay on hold until it could make a better call on the outlook.

That in turn was a setback from just a month earlier, when the Fed raised rates for the first time in nearly a decade and seemed ready to move four more times this year.

This week, fresh forecasts from the Fed’s 17 officials released after the meeting will almost certainly signal a retreat from that pace, to perhaps two or three rate hikes this year, economists predict and Fed officials themselves have suggested.

But the expected downgrade may largely reflect the drag from the oil and stock market slide in January and the Fed’s decision then to put policy on hold, rather than mounting worries over the U.S. or global outlook.

Indeed, since the last Fed meeting U.S. inflation has shown signs of stabilizing, with one measure published by the Dallas Fed rising to 1.9 percent, its closest to the Fed’s 2 percent goal in 2-1/2 years. Meanwhile, the U.S. unemployment rate held at 4.9 percent in February, near the level many Fed officials believe represents full employment.

The European Central Bank’s decision last week to ease policy further may help add to confidence that action has been taken to underpin growth in Europe, helping ensure a stalling of global growth drag on the U.S.

That could mean another U.S. rate hike by mid-year and, depending on economic data, more to come after that.

“June seems certainly like a possibility” for the Fed’s next rate hike, said former Minneapolis Fed President Narayana Kocherlakota, whose own preference is for the Fed to take out “insurance” against a recession by cutting rates back to near zero. Market-based inflation expectations have improved somewhat since the Fed’s last meeting, he said, “a real positive” development.

INFLATION DEBATE

Still, Kocherlakota’s former colleagues will likely spend plenty of time discussing the inflation outlook. That much was clear last week, when two top Fed officials, speaking simultaneously at separate Washington events, gave diverging assessments of recent evidence of rising prices.

More hawkish rate setters worry that if the Fed does not act to preempt inflation, it could end up behind the curve and lose credibility, while the more dovish members believe the economic recovery is still fragile and want to see firm evidence of inflationary pressures.

“That’s probably internally the biggest grounds for debate,” said Regions Financial Corporation economist Richard Moody.

The Fed will also need to tackle how to characterize the “balance of risks” to their baseline outlook, he said, particularly if policymakers want to keep the door open to rate hikes in April or June.

“If they truly want the markets to believe that all the meetings are on the table (for a potential rate hike) then I would think they have to have something in there,” Moody said, predicting they will characterize risks as “nearly balanced,” the same phrase they used before December’s rate hike.

And yet, others say, Fed Chair Janet Yellen will be wary of sending too strong a signal of coming rate hikes, for fear of roiling markets.

“By June they will have a broad clutch of data and that could help them, and even some of the doves the Federal Open Market Committee, to come to a solid conclusion (on the desirability of a rate hike) and a conclusion, by the way, that the market agrees with,” said Quincy Krosby, a market strategist for Prudential Financial.

(Reporting by Ann Saphir; Editing by Meredith Mazzilli)

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The value of the dollar’s net long position declined to $6.88 billion in the week ended March 8, from $7.45 billion the previous week.

The U.S. February jobs report last week showed a drop in wages overshadowed strong jobs growth, feeding views the Federal Reserve was in no hurry to hike interest rates. The dollar weakened, and its poor performance continued early this week as concerns about weak Chinese data spurred safe-haven demand for the yen and Swiss franc.

So far in March, the dollar index was down 2 percent, on track for its weakest monthly performance since last April.

In other currencies, investors pushed net long positions on the yen to their highest in eight years. Net long contracts on the yen rose to 64,333 this week, from 59,625 the week before.

Fears about a British exit from the EU and persistent concerns about the global economy have boosted the yen, a safe-haven currency that so far this year has gained 5.4 percent against the dollar.

Net shorts on the euro rose to the largest since early February. This week, net euro shorts rose to 71,907 contracts from 68,541 previously.

The Reuters calculation for the aggregate U.S. dollar position is derived from net positions of International Monetary Market speculators in the yen, euro, sterling, Swiss franc and Canadian and Australian dollars.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Bernard Orr and David Gregorio)

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By Jan Strupczewski and Gernot Heller

SHANGHAI (Reuters) – The world’s top economies are set to declare on Saturday that they need to look beyond ultra-low interest rates and printing money if the global economy is to shake off its torpor, while promising a new focus on structural reform to spark activity.

A draft of the communique to be issued by the Group of 20 (G20) finance ministers and central bankers at the end of a two-day meeting in Shanghai reflected myriad concerns and policy frictions that have been exacerbated by economic uncertainty and market turbulence in recent months.

“The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the leaders said in a draft seen by Reuters.

“Monetary policies will continue to support economic activity and ensure price stability … but monetary policy alone cannot lead to balanced growth.”

Geopolitics figured prominently, with the draft noting risks and vulnerabilities had risen against a backdrop that includes the shock of a potential British exit from the European Union, which will be decided in a June 23 referendum, rising numbers of refugees and migrants, and downgraded global growth prospects.

But there was no sign of coordinated stimulus spending to spark activity, as some investors had been hoping after the market turmoil that began 2016.

DIVISIONS OVER DEBT, RATES

Divisions have emerged among major economies over the reliance on debt to drive growth and the use of negative interest rates by some central banks, such as in Japan.

Germany had made it clear it was not keen on new stimulus, with Finance Minister Wolfgang Schaeuble saying on Friday the debt-financed growth model had reached its limits.

“It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy,” he said.

The G20, which spans major industrialized economies such as the United States and Japan to the emerging giants of China and Brazil and smaller economies such as Indonesia and Turkey, reiterated in the communique a commitment to refrain from targeting exchange rates for competitive purposes, including through devaluations.

While G20 host China has ruled out another devaluation of the yuan <CNY=CFXS> after surprising markets by lowering its exchange rate last August, there still appeared to be concerns that some members may seek a quick fix to domestic woes through a weaker currency.

Japanese finance minister Taro Aso said late on Friday he had urged China to carry out currency reform and map out a mid-term structural reform plan with a timeframe.

U.S. Treasury Secretary Jack Lew also encouraged China on Friday to shift to a more market-oriented exchange rate in “an orderly way” and “refrain from policies that would be destabilizing and create an unfair advantage”.

(Reporting by Gernot Heller, Jan Strupczewski, Adam Jourdan, Brenda Goh and Kevin Yao in Shanghai, and Tetsushi Kajimoto in Tokyo; Writing by John Ruwitch and Pete Sweeney; Editing by Alex Richardson)

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