While market participants are betting that the U.S. Federal Reserve will cut interest rates later this year to push up inflation, the central bank could achieve higher inflation without lowering rates, a U.S. economist said on Feb. 21.

"The first is that easier policy does not have to take the form of a rate cut. It could take the form of a lower path of future policy rates in the Summary of Economic projections. Just pull out the forecasted 2021 rate hike," Tim Duy, professor at the University of Oregon and a long-time Fed watcher, wrote in an analysis.

Meanwhile, Fed officials saw the balance of risks as having shifted in a more favorable direction since their December meeting and the monetary policy is always "data dependent", Duy said.

"If they have more faith that the economy will accelerate to above trend growth after the policy review, they could easily decide another rate cut was unnecessary," he argued.

Duy's comments came after the minutes of the Fed's policy meeting in January showed that Fed officials moved closer to explicitly allowing the U.S. economy to run hot enough to push inflation above its target of 2 percent for a period of time.

"Several participants suggested that inflation modestly exceeding 2 percent for a period would be consistent with the achievement of the Committee's longer-run inflation objective and that such mild overshooting might underscore the symmetry of that objective," the Fed said in the minutes released Wednesday.

"While a rate cut looks to be the logical conclusion of the Fed's policy review - and is what the market expects -- it may still decide it can achieve higher inflation without lowering rates," Duy said.

While the Fed was closely monitoring risks, in particular the novel coronavirus, there is no indication at this point that the epidemic will impact monetary policy, Fed Vice Chairman Richard Clarida said Thursday.

"What we will be looking for is some body of evidence that suggests that we need to make a material reassessment of our outlook. And certainly we have not done that yet", Clarida said in an interview with CNBC, adding the "fundamentals in the U.S. are strong".

The Fed lowered interest rates three times in 2019, cutting the target range of the federal funds rate by 75 basis points to 1.5-1.75 percent. After wrapping up its first monetary policy meeting of 2020 in late January, the Fed left interest rates unchanged and maintained a wait-and-see stance.

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