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Ears pricked for Fed's signals on Wednesday

Ears pricked for Fed's signals on Wednesday

Big question: When will bank decide economy is strong enough for more interest rate hikes?

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WASHINGTON (AP) — The financial world is awaiting the Federal Reserve's answer this week to a critical question: How stable are the world's economies and financial markets?

Whatever picture the Fed sketches after its Wednesday meeting will help shape expectations of when it will resume the interest rate increases it began in December. That's when the Fed, for the first time in a decade, raised its key rate from record lows to reflect an economy finally strong enough — 6 1/2 years after the Great Recession ended — to withstand higher loan rates.

Since then, though, stocks and oil prices have tumbled and China has struggled to manage a sharp slowdown.

Now, as investors have regained some of their losses, as the U.S. job market is improving and as major overseas economies are still weak but stable, the Fed might be inching closer to raising rates again.

Just not yet. Most Fed watchers think the central bank wants more time to assess the financial landscape. Resuming its rate hikes too soon could slow growth or rattle investors again. They say they expect that Fed Chairwoman Janet Yellen, in a press conference after the meeting ends Wednesday, probably will nod to improvements since the Fed last met in January but also stress continuing uncertainties.

"Financial markets have stabilized a bit, but the situation abroad still looks worse than in the United States," said Diane Swonk, chief economist of DS Economics. "The Fed will give some signals that they feel better about where things are now compared to January but also signal that they don't have an itchy trigger finger in terms of raising rates."

The Fed has two mandates: to maximize employment and to keep prices stable. Essentially it has met just one recently: In February, the United States added a robust 242,000 jobs — roughly the monthly average for the past six months. And the unemployment rate is 4.9 percent, close to the rate the Fed considers full employment.

But prices? Inflation has been stuck below the Fed's 2 percent target rate for nearly four years. Too-low inflation — thought it might sound appealing — tends to make people postpone purchases, which slows consumer spending, the economy's main fuel. Too-low inflation also makes the inflation-adjusted cost of loans more expensive.

Therefore, before further raising interest rates, the Fed wants to see more evidence that inflation is picking up. Its preferred inflation gauge did rise in January, showing a 12-month increase of 1.3 percent. At the end of December the figure was just 0.7 percent. But the January figure is still well below the Fed's target.

Recent comments from Fed officials suggest that they differ on how to interpret inflation prospects.

Vice Chairman Stanley Fischer said last week that the Fed may "be seeing the first stirrings of an increase in the inflation rate, something that we would like to see."

Fischer suggested that two factors that have been depressing inflation — lower oil prices and a strong dollar, which reduces import prices — are starting to wane.

On the other hand, another Fed board member, Lael Brainard, said last week that she saw "troubling indications" that inflation could dip again. She also said she worries that weakness in China, Japan and other places could slow the U.S. economy.

At the Fed's rate hike in December, it signaled the likelihood of four additional hikes in 2016. The turmoil since then has prompted most analysts to revise their predictions: to two rate hikes this year, perhaps beginning in June. Some think the Fed might even decide to leave rates unchanged for the entire year.

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