The Federal Reserve is expected to lower benchmark borrowing costs modestly on Wednesday as an additional bulwark against the risk a housing slump and tighter credit drag down the rest of the economy.
Fed officials, who will announce their decision around 2:15 p.m., resumed their two-day meeting at 9 a.m.
They have offered few clues on their likely course of action, but financial markets are betting that a spate of weak economic data will lead policy-makers to cut overnight U.S. interest rates by a quarter-percentage point, to 4.5 percent.
That would follow last month's surprisingly large half-point reduction, a move Fed officials had hoped would put them out in front of any potential economic weakness.
"In an economic expansion that had already slowed, leading sectors continue to display surprising softness and further cautious policy action can help to contain a widening out of the damage," Citigroup economist Robert DiClemente wrote in a recent analysis.
But that view is not universally held. Some analysts think the Fed may determine that housing woes are not crimping consumer or business spending and may decide the best course is to hold rates steady out of concern a misstep might ignite inflation.
Data released early on Wednesday showed economic growth was even stronger than analysts had expected, with third-quarter U.S. gross domestic product rising at a 3.9 percent annual rate, its fastest rate since the beginning of 2006.
Economists surveyed by Reuters had forecast that growth would slow to 3 percent partly in expectation that dispirited consumers hurt by falling house prices would trim spending. Surveys have shown that consumer confidence has suffered as a subprime mortgage crisis lingers on.
The job market also looked healthier than expected. U.S. private employers added 106,000 jobs in October, according to ADP Employer Services, well above analysts' expectations for a gain of 60,000.
"Certainly the GDP number was much stronger than anticipated and that may lead to some second-guessing about what the Fed may do this afternoon, coming on top of that ADP number which was also much stronger," said Scott Brown, chief economist with Raymond James in St. Petersburg, Florida.
Treasury bond yields rose and the downtrodden dollar (.DXY: Quote, Profile, Research) regained some ground after the strong GDP figure, while U.S. stocks (.DJI: Quote, Profile, Research) (.IXIC: Quote, Profile, Research) (.SPX: Quote, Profile, Research) looked likely to open higher.
Market bets on the chances of a rate cut slipped following Wednesday's data, but they had risen in recent weeks as a parade of gloomy economic reports have suggested the economy will be weaker in coming quarters than anticipated by the Fed.
On Tuesday, data showed U.S. consumer confidence slipped for a third straight month in October, while home prices posted their biggest drop in 16 years during August.
While markets largely anticipate a cut, some analysts think investors have overestimated the Fed's appetite for another rate reduction and that the economy, while growing modestly now, is already poised for a pick-up next year.
This hold-steady argument gained prominence with a Wall Street Journal article published late on Monday that said the Fed was weighing the risk that a rate cut would fuel an inflationary psychology.
The question for the policy-setting Federal Open Market Committee is whether recent economic data suggests that its outlook needs to be revised.
"Once we get through any near-term weakness caused by the extra downleg from the housing contraction and any spillover from tighter credit conditions, I am looking for moderate growth with high levels of employment," Fed Vice Chairman Donald Kohn said on October 5.