The stock market doesn't want any surprises from the Federal Reserve's meeting Tuesday. It is widely expected that the central bank will keep its benchmark short-term rate, paid by banks on overnight loans from other banks, near zero.

 

That means investors and analysts will once again pore over the Fed's statement accompanying its rate decision, looking for any change in wording from its Jan. 27 statement, to get a sense of when rates might rise.

 

The Fed will eventually have to raise interest rates to fight the inflation that can result from expanding economic activity.

 

Although the market has factored in a rate hike, stock investors might still react badly in the short term to any indications that an increase is in the offing.

 

The Fed has kept the language of its statements essentially unchanged for months, making these points repeatedly:

 

* Inflation is likely to be "subdued for some time."

* Economic conditions "are likely to warrant exceptionally low levels of federal funds rate for an extended period."

* Economic activity has "picked up" or strengthened.

 

The repetition isn't an accident. Chairman Ben S. Bernanke and other Fed governors know that any new language that casts doubt about the Fed's intentions could disrupt the market and even hurt the economic recovery.

 

Analysts say it will probably take several months of solid, significant economic growth before the Fed starts to tinker with its statement or with interest rates. 

 

Consistent job growth is probably the single biggest factor the Fed will look at when determining when to raise rates.

 

Even if the Fed's comments don't change this week, investors can look to see whether any more members of the central bank's interest-rate committee dissent from the announced decision, including the language in the statement.

 

In January, Kansas City Federal Reserve President Thomas Hoenig dissented, saying the economy had recovered enough that low rates for "an extended period" were no longer needed.

 

If additional policymakers dissent, that could be a sign the Fed will increase rates sooner rather than later.

 

Source - http://www.latimes.com