Fed likely to signal rate hike on track despite global woes

By Howard Schneider and Michael Flaherty

WASHINGTON (Reuters) - A sturdy U.S. recovery is expected to trump global economic worries as the Federal Reserve concludes its last policy meeting of 2014 on Wednesday, with officials likely to signal they are still on track to raise interest rates next year.

With oil prices in freefall, Japan in recession and the euro zone sputtering, the Fed for a second consecutive meeting will weigh the U.S. economy's apparent strength against overseas risks that now include a potential currency crisis in oil exporter Russia.

Investors continued looking for safe haven assets in light of Russia's turmoil as Fed officials met for a second day, while fresh data confirmed an expected softening of U.S. inflation.

U.S. consumer prices fell O.3 percent in November, led by the largest decline in gasoline prices since December 2008.

Fed officials have expected a temporary softening of inflation given the big plunge in oil prices, but have indicated signs of strength in the job market elsewhere have left them confident U.S. wages and prices will eventually start to rise.

In addition, the drop in oil prices cuts two ways - threatening economies like Russia that depend on oil exports while providing a boon to consumers. For the United States, lower oil costs are considered an overall plus in the long run, even though they pose an immediate drag on inflation and may trim jobs and investment in the energy industry.

"Russia is going to have absolutely no influence on the Fed whatsoever," said Paul Ashworth, chief U.S. economist for Capital Economics. "The collapse in oil prices is unambiguously good for the U.S. economy."

Attention will focus on just how strongly the Fed voices its faith in U.S. prospects, and in particular whether it drops its longstanding view that it would wait a "considerable time" before raising rates. Most economists expect the phrase to be jettisoned.

With the drop in oil prices likely to slow progress toward the Fed's 2 percent inflation goal, officials face a possible quandary over how to characterize an economy that is growing steadily but showing less evidence of durable wage and price increases.

The recent flow of positive domestic news "is beginning to provide the necessary justification for the Fed to begin consideration of the start of monetary policy tightening," TD Securities economist Millan Mulraine said in a recent note to clients.

Economists expect the U.S. central bank, which has held overnight rates near zero since late 2008, to begin bumping benchmark borrowing costs higher around the middle of next year.

The Fed will issue its policy statement and updated economic and interest rate projections at 2 p.m. (1900 GMT). Fed Chair Janet Yellen will hold a news conference a half hour later.

In a statement after its last meeting in late October, the Fed largely looked beyond problems in Europe and Japan and expressed confidence the U.S. economy would continue to grow and generate jobs.

Wednesday's statement will provide an indication of whether the economic troubles plaguing Europe and Japan and the threat of a currency run in Russia are likely to delay the Fed's plan to raise rates.

(Reporting by Howard Schneider and Michael Flaherty in Washington; Editing by Tim Ahmann, Leslie Adler and Paul Simao)