The Federal Reserve is expected to nod to an improving U.S. economic outlook on Wednesday even as it reaffirms a plan to buy $600 billion in government debt to help speed recovery.
Fed policymakers, wrapping up a two-day meeting, will outline their views of the economy and monetary policy in a statement expected at about 2:15 p.m. (1915 GMT). Policymakers resumed their meeting at 9 a.m. (1400 GMT).
The policy-setting Federal Open Market Committee will likely take note of growing reasons for economic optimism. Consumer spirits are rising, factory activity is strengthening and claims for jobless aid are sliding.
Officials also could take some comfort that inflation may have bottomed out, removing some anxiety about the risks of an outright deflationary spiral.
But with the unemployment rate still at a lofty 9.4 percent, and with gains in corporate profits and stock prices not translating into a stronger job market pulse, the Fed is widely expected to signal its bond-buying plan is on track.
They want to be quite circumspect, not talk up the economy and end up burning themselves with too optimistic an assessment, said Cary Leahey of Decision Economics in New York.
Soaring commodity prices have fueled inflation worries around the globe, and European Central Bank President Jean-Claude Trichet has warned they present a threat. The Fed, however, is unlikely to feel any great urgency to unwind its easy policy with core U.S. inflation at five-decade lows.
The dollar hit a two-month low against the euro on Wednesday as investors bet the ECB would be quicker to tighten policy than the Fed, but the greenback later got a lift from data showing a big jump in U.S. single-family home sales in December.
Any shift toward a more hawkish tone on prices in the Fed's statement could lift the dollar further, analysts said.
Stocks, already effervescent after the pro-business tone of President Barack Obama's State of the Union speech late Tuesday, also got a boost from the housing data, which pushed prices for U.S. government debt lower.
NEW HAWKS TAKE ROOST
The annual rotation of voters among regional Fed bank presidents brings aboard two who have been outspoken skeptics regarding aggressive Fed easing programs. Even so, many analysts deem it unlikely both will dissent at the central bank's first policy meeting of the year.
Instead, one or both of the hawks, Philadelphia Federal Reserve President Charles Plosser and Dallas Fed leader Richard Fisher, may opt to keep their powder dry until the Fed needs to decide whether to extend the bond purchase program, which is due to run its course by mid-year.
The U.S. economy is expected to have expanded by a reasonably robust 3.5 percent annual rate in the fourth quarter after growing at a 2.6 percent pace in the July-September period. Similar vigor early this year may make the case for an ultra-accommodative monetary policy harder to sustain, even if unemployment remains relatively high.
With inflation outside of food and energy at 50-year lows in the United States, the Fed had been worried about a vicious cycle of falling prices and declining spending and investment.
But the brighter economic signs have left Fed officials breathing easier. We're seeing some improvement in the labor market. I think deflation risk has receded considerably. And so we're moving in the right direction, Fed Chairman Ben Bernanke said on January 13.
Still, officials realize it will take a long time to fill the hole left by the 2007-2009 recession and they have set a high bar for any changes to their bond buying plan, which markets expect to be completed in full.