With U.S. Rebound Tepid, Fed Language Shift Unlikely

WASHINGTON (Reuters) - With America still in a defensive crouch after a crushing recession and financial meltdown, the U.S. Federal Reserve is unlikely to soften its promise of rock bottom interest rates soon.

Nascent signs of recovery have been stacking up and financial markets will be watching next week's Fed policy-setting meeting for any hint the central bank is moving closer to withdrawing its extensive support for the economy.

But with unemployment expected to go above 10 percent and factory capacity use near post-World War Two lows, there is doubt whether the economy can stand on its own feet after generous government spending programs and tax breaks dry up.

"The difficult conditions in labor markets and the consequent implications for household incomes are important reasons for my expectation that the recovery in overall economic activity moving into next year will be restrained," Fed Vice Chairman Donald Kohn said two weeks ago.

The Fed chopped interest rates to near zero in December. On top of that it has flooded the financial system with hundreds of billions of dollars to pull the economy out of the worst financial crisis and most painful recession in decades.

Initially, it said it anticipated exceptionally low interest rates for "some time." In March, it deepened that commitment to "an extended period" -- a pledge it has repeated in every Federal Open Market Committee statement since then.

"The committee ... continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the policy panel said after its last meeting on September 22-23.

The phrase is a critical piece of a statement that officials could dial back to prepare markets for tighter money.

However, officials are still nervous about the recovery and appear likely to conclude at their meeting on Tuesday and Wednesday that tinkering now would send a premature signal.