By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve is expected to keep monetary policy locked in crisis-fighting mode on Wednesday as the U.S. central bank assesses an economy still struggling through the shock of a pandemic but looking forward to relief from a vaccination campaign and another government aid package.

The Fed, which will release its latest policy statement at 2 p.m. EST (1900 GMT), has used its recent meetings to roll out significant changes, linking any future increase in interest rates to a persistent rise in inflation, and tying any change in its $120 billion in monthly bond purchases to “substantial further progress” on its employment and inflation targets.

If anything, economic data since Fed officials met in the middle of December has been disappointing, and analysts say policymakers will likely fend off any suggestion that the economic boost from vaccines or a possible surge in inflation this spring will cause them to waver on the promise of continued loose monetary policy.

Major U.S. stock indexes were down about 1% in mid-morning trading, with analysts attributing the fall to concerns that vaccinations may not roll out as fast – or allow the economy to reopen as soon – as initially expected.

U.S. bond yields also dropped and a measure of longer-term market inflation expectations fell towards the Fed’s 2% target after a recent rise, evidence the recovery has not gained full traction and a pullback that, if sustained, would worry the central bank.

Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said she, like many economists, anticipates a “mini-boom” beginning in the spring as more of the U.S. population is vaccinated against the virus, people feel freer to travel and spend, and the Biden administration’s own spending plans move forward.

About 25 million people had received at least one of the required two doses of vaccine as of Sunday, and President Joe Biden hopes to boost the pace of daily shots to 1.5 million. He has requested an additional $1.9 trillion in government spending to speed up the vaccinations and expand benefits to U.S. businesses, workers and families hard hit by the pandemic.

Though that could fuel faster economic growth, Fed Chair Jerome “Powell will maintain his dovish tone for now,” by noting that inflation remains below the central bank’s 2% annual target and employment is still about 10 million short of its pre-pandemic level, Bostjancic wrote.

Powell is scheduled to hold a news conference half an hour after the release of the policy statement.

INFLATION TALK

Since approval of the first coronavirus vaccines in December, Fed officials have shared a general view that the U.S. economy was likely entering what one called the “endgame” of the pandemic, marked by short-term risks but likely buoyant growth in the second half of the year.

Fed policymakers, however, also have noted the large hole left in the economy, particularly the job market, after a year in which activity crashed spectacularly and then only partially rebounded. The United States actually lost jobs in December.

Many of the steps the Fed took last spring in response to the onset of recession, including slashing interest rates to zero, are now expected to remain in place for a potentially extended period of time – with policymakers not anticipating the need to raise rates for perhaps three years.

That’s designed to help push the economy onto a path of both higher employment and one that meets, after years of misses, the central bank’s 2% inflation goal.

Investors appear to have taken the Fed’s higher inflation talk seriously. The expected inflation rate over the longer term as measured by Treasury securities indexed for inflation has moved above 2%. Fed officials also have begun laying the foundation to ignore what’s expected to be a spike in prices this spring and summer, spurred by faster economic activity but also distorted by comparison to weak prices last year.

“The rebound in market-based inflation compensation measures will not alarm the Fed,” said Paul Ashworth, chief U.S. economist for Capital Economics. “Instead, Fed officials are more likely to view the rise as a welcome vindication of the tweaks they made to the policy framework.”

(Reporting by Howard Schneider; Editing by Andrea Ricci and Paul Simao)