The Fed comes into today's meeting with macro-economic signs pointing upward.

Stocks are at 20-month highs and there has been an up-tick in economic data including better figures of late on consumer spending, manufacturing, even housing. But the report that matters - jobs created in non-farm payrolls - continues to be stubbornly weak.

Inflation is also pretty minimalistic, and since those are the two main parameters or triggers for why the Fed decided to conduct quantitative easing 2 - it seems they will stay pat with the full $600 billion program and will create a fortified front in saying it's the right thing to do.

Still it will be critical to hear what the Fed will say on the outlook for inflation and growth.

What will the Fed say on Inflation?

Any hint of a more upbeat view of the economy or less favorable view of inflation will lead to projections of a more rapid move towards rate hikes, which would be a positive development for the USD.

Will the Fed change its language on inflation? In its previous statement in December officials said that measures of underlying inflation continued to trend down. Will we hear the Fed say that they now see inflation flattening out? Such a change in language in the statement would mean that the Fed sees that inflation is bottoming out, and since inflation is 1 of the 2 key reasons for quantitative easing and loose monetary policy, it would mean the Fed officials are close to the point of starting to talk about an exit strategy.

Consumer prices rose were up 0.5% for December, higher than expected, and the annual rate rose to 1.5%. Excluding food and energy CPI was up 0.1%, and remained at 0.8% on the year. The rise in inflation therefore is mainly driven by higher prices at the pump and at the grocery store. Therefore the Fed statement may say that underlying inflation remains depressed, despite higher prices for food and energy.

The majority of Fed officials this that high unemployment rate will keep wage growth low, but it is affecting financial markets as they start asking the question when will it by time for the Fed to raise rates.

In November, the FOMC projected inflation, as measured by the personal consumption expenditure index, in a range of 1.1% to 1.7% in 2011, and 1.1% to 1.8% in 2012. They update their projection forecasts next month.

Will Fed Give a Nod to Better Growth?

As we mentioned the macro-economic data has been better of late, but the Fed statement, while acknowledging the fact, will still remain cautious because of the high unemployment rate. The FOMC may give a nod to stronger consumer spending, which will mean a more optimist picture about the recovery, but at the same time the progress towards a recovery in the labor market and towards price stability will once again be described as disappointingly slow. That means the Fed will stick to its language of keeping rates at exceptionally low levels for an extended period - which has come to mean the next six months and beyond.

The forecast for US GDP growth during the 4th quarter is for the economy to have accelerated to a 3.5% annual growth rate, from a 2.6% rate in the third quarter. In December, the Fed said the recovery was too slow to bring down unemployment and does it still hold this view. While we did see the unemployment rate drop from 9.4% in November to 9.8% in December - it was based more on people leaving the labor force than an influx of new jobs that made the difference.