Adds Trump comments, background in paragraphs 1-5

By Howard Schneider

WASHINGTON, June 18 (Reuters) - The Federal Reserve is expected to keep interest rates unchanged on Wednesday as its policymakers assess signs of a cooling economy, the risk of higher inflation from U.S. import tariffs, an escalating crisis in the Middle East, and fresh demands by President Donald Trump for increasingly deep reductions in borrowing costs.

Speaking several hours before the Fed was due to release its latest policy statement and updated economic and interest rate projections, Trump said he did not expect it would cut rates on Wednesday, but added that in his view the benchmark overnight rate already should have been lowered by a further two percentage points - a near halving of the current 4.25%-4.50% range that would be seen as stimulating an economy still wrestling with inflation.

The president also lashed out at Fed Chair Jerome Powell as a "stupid person."

"I think he hates me," Trump said of Powell in comments to reporters in which he blamed the Fed for making it more expensive for the U.S. government to finance its deficits. "He should. I call him every name in the book."

Yields on U.S. Treasury bonds can be influenced by monetary policy, but are set by global market trading and have varied widely in the first months since Trump returned to office in January even with no change in the Fed's policy rate.

The central bank's latest meeting takes place amid rising tensions in the Middle East.

Missile strikes between Israel and Iran continued for a sixth straight day on Wednesday, with Trump hinting at possible U.S. involvement and Iran's Supreme Leader Ayatollah Ali Khamenei warning against it.

For all its intensity, the conflict has only pushed the price of oil up about 10% so far to around $77 per barrel, far below the $120 peaks after Russia's 2022 invasion of Ukraine, a shock that hit a wide array of commodity markets and influenced Fed officials' thinking as they prepared to raise rates.

Yet the risk is there.

Oil prices should moderate in coming months, all things being equal, Goldman Sachs analysts wrote on Wednesday, but could top $100 a barrel "in extreme tail scenarios where regional oil production or shipping ... is disrupted for an extended period."

It was a series of oil shocks in the 1970s that ignited one of the most serious bouts of U.S. inflation, and while the country is now a net oil exporter, a prolonged global price shock could mean more volatility and less clarity for the Fed.

Since setting its benchmark interest rate in the current 4.25%-4.50% range in December, the Fed has watched the economic outlook grow ever cloudier, particularly after Trump returned to power in January and quickly overhauled U.S. trade policy by announcing sharply higher levies on imported goods.

While many of the tariffs have been delayed, key issues remain unresolved and on the radar of U.S. central bank officials as a probable source of higher inflation.

Data on the job market, retail sales, and other aspects of the U.S. economy meanwhile suggests growth may be weakening. While U.S. jobless claims fell over the past week, with firms reluctant to lay off workers, month-to-month employment growth has been slowing.

Data released on Wednesday showed the housing industry is in the doldrums. Housing starts fell nearly 10% in May to the lowest level since the early months of the COVID-19 pandemic in 2020, while permits fell 2.0% in a sign of future weak supply.

For Fed officials, that means a longer wait for the sort of clarity on the economy's path that policymakers say they need before giving much new guidance on interest rates.

A National Association for Business Economics survey released on Monday showed economists still painting a stagflationary picture, with 2025 GDP growth expected to ebb to 1.3%, down from the 1.9% projected in early April, with inflation ending the year at 3.1%, a percentage point higher than the reading in April and well above the Fed's 2% target.

Respondents said the unemployment rate, which was 4.2% in May, would end this year at 4.3% before beginning a steady rise to 4.7% in early 2026.

'PARALYZED BY TRUMP'S UNCERTAINTY'

With risks to both the Fed's inflation and employment goals and the unresolved questions around Trump's policy plans, investors expect the central bank to be anchored where it is for perhaps months to come, with no further rate cuts until September. Trump has demanded an immediate reduction in borrowing costs.

The U.S. central bank cut rates three times in 2024.

"The Fed's revealed preference is to be paralyzed by Trump's uncertainty. Central bankers are always a conservative bunch, and with risks to both sides of their mandate, the bias is to wait and see if the next few months will resolve their dilemma. Meanwhile, the president ain't happy," Dario Perkins, an economist at TS Lombard, wrote in an analysis of where the Fed stands in relation to the current economic data and what Trump wants the central bank to do.

The Fed will release its policy statement and policymakers' updated projections at 2 p.m. EDT (1800 GMT). Powell is scheduled to hold a press conference half an hour later.

Michael Feroli, chief U.S. economist at JP Morgan, said he did not expect any substantive changes in the policy statement, with recent job growth still solid, inflation remaining above the Fed's target, and uncertainty elevated.

Policymakers' projections, however, will provide an updated sense of how they expect the economy to evolve in coming months, and how monetary policy may need to respond. The last round of projections in March showed they expected the Fed to deliver two quarter-percentage-point rate cuts by the end of 2025, a view that matches current market pricing.

(Reporting by Howard Schneider; Editing by Paul Simao)

((howard.schneider@tr.com))