Fed tries to match economic risks against market's rush to tighten

REUTERS/Leah Millis/File PhotoWASHINGTON, Jan 24 (Reuters) - The Federal Reserve may not raise interest rates until March, but officials' tougher language about inflation is already kicking in, with borrowing costs rising for everyone from homebuyers to the federal government and stock markets kicking off the year deep in the red.The pace of that adjustment now poses an unexpectedly urgent question for U.S. central bank officials at their latest two-day policy meeting this week: Are financial markets tightening too fast for what the Fed intends in its inflation battle, or is the Fed the one underestimating what will ultimately be needed to slow the pace of price increases?In their most recent projections, issued in December, policymakers said they expected as many as three quarter-percentage-point rate increases this year, with more in the cards in 2023 and 2024. That would leave the Fed with the tough choice of raising interest rates in March in the face of declining employment.Even a temporary Omicron-related "dip" keeps alive concerns that the Fed this year will face not the best, but the worst of both worlds in the form of a slowing economy and inflation that needs even tougher medicine than officials have yet prepared to deliver.In an interview this month ahead of the Fed's pre-meeting blackout period, Atlanta Fed President Raphael Bostic said the depth of the dilemma turns in part on the degree to which inflation falls on its own, without the need of restrictive Fed policy to force it down through slower growth and slowed employment.That could happen if, as some economists expect, the virus eases and more workers return to jobs - boosting the supply of goods and services and easing the pace of wage hikes - or if global supply disruptions subside.There is, however, no guarantee.Before the onset of the coronavirus, the Fed was struggling against dynamics that kept inflation perennially below its 2% target, and "there is a narrative that says once we are past the pandemic those forces take over so you don't need as aggressive a policy posture," Bostic said.