Bank of Montreal economists predict that the U.S. Federal Reserve Board will hold interest rates steady in the coming months.

In a review of the Fed’s policy-making decisions, BMO chief economist Tim O’Neill says “the Fed is expected to remain on the sidelines for the rest of the year as the economy responds to the substantial amount of monetary and fiscal stimulus in the system.

However, he concedes that if there is a move it will likely be to the downside.

The BMO report looks at 18 indicators used by the Fed in making its decisions. It finds that seven of them are weak, seven are neutral and only four are positive. The negatives include important areas such as employment growth, GDP, capacity utilization and prices, while the positives are in secondary areas such as money growth, the yield curve and the dollar

“The ongoing downward trend in employment and inflation flag the risk of a near-term reduction in rates. Looking further out, the Fed is expected to begin unwinding the monetary stimulus in 2004 once the economic recovery is firmly established,” says O’Neill.

He pegs the chance of a rate cut by August 12 at 35%, with a 4% chance of a move by September 16.