The U.S. Federal Reserve on Tuesday began a meeting where policymakers are likely to leave monetary policy on hold but not rule out further easing as they acknowledge a somewhat brighter economic outlook.

In the latest release pointing to strength following last week's firm reading on employment, U.S. retail sales climbed 1.1 percent in February, the biggest gain in five months.

Still, the U.S. central bank is likely to remain concerned by an unemployment rate that remains at an elevated 8.3 percent, a symbol of what many officials see as a high level of unused productive capacity.

I just don't see them being anywhere near ready (to take action) and certainly not under any pressure to make any judgment this week about which way things are going to go, said Nigel Gault of IHS Global Insight in Lexington, Massachusetts. This is really the occasion for them to do absolutely nothing.

Fed officials are expected to nod to the labour market's stronger pulse in a statement due at about 2:15 p.m. (6.15 p.m. British time). But they are also likely to warn that unemployment is due to decline only gradually given modest demand for U.S. goods and services and a still weak housing market.

Officials may also offer a cautionary note on high energy prices, mindful that a jump in gasoline prices contributed to snuffing out promising signs of recovery last year.

While the Fed's assessment of the recovery will likely shift in deference to the latest data - including Friday's report that showed the economy created more than 200,000 jobs for a third straight month in February - most analysts expect its words on policy to be nearly identical to its statement after its last meeting in January.

In January, the Fed said it did not expect to raise interest rates until at least late 2014 - 18 months later than its previous estimate, as the Fed voiced caution about the progress in the economy.

The Fed cut benchmark overnight rates to near zero in December 2008 and has bought $2.3 trillion worth of bonds to push other borrowing costs lower and stimulate growth.

While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment. Although the jobless rate has fallen significantly over the last six months, it remains stubbornly high

Tuesday's meeting will close without a news conference by Fed Chairman Ben Bernanke or new economic forecasts to offer policy guidance. Instead, details on the thinking behind the Fed's terse statement will only emerge from speeches by officials and the meeting's minutes, which are released with a three-week lag.

Graphic-Fed forecasts: http://link.reuters.com/zud36s

Graphic-Fed hawks vs. doves: http://link.reuters.com/ryv97p

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BETS ON BOND BUYING

While the Fed may be content to bide its time for now, policymakers are likely to debate whether the recovery has taken hold enough to keep the quantitative easing spigot shut.

Even after the Labor Department last week reported the economy added 227,000 jobs in February, economists at the large institutions that trade directly with the Fed believed the central bank would launch another bond-buying spree worth more than $500 billion.

Many economists think the central bank may hold off a decision until its June meeting. The Fed is currently reweighting its portfolio to push long-term interest rates lower, a program that runs its course at the end of June.

Further policy easing remains an option, and any slippage in progress towards full employment will likely be met by additional asset purchases by the Fed, said Millan Mulraine, senior U.S. strategist for TD Securities in New York.

A Wall Street Journal article on Thursday, which said officials were considering buying new bonds but offsetting those purchases with short-term loans to keep the quantity of bank reserves in the system in check, fuelled speculation that additional purchases were a live option.

Bernanke disappointed some investors by barely mentioning the prospect of an additional round of bond buying in four recent appearances before Congress. Many Republican lawmakers are unhappy with the Fed's asset purchases, which they view as sowing the seeds of inflation, weakening the dollar and hurting savers.

(Additional reporting by Pedro da Costa; Editing by Neil Stempleman)