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What Fed Policymakers Are Looking At This Week

Financial markets widely expect the U.S. Federal Reserve to hold benchmark interest rates steady on Wednesday, marking the fifth straight meeting it has stayed on hold after 17 increases that ended last June.

Markets will likely comb through the Fed's statement for insight into its policy outlook. Unexpectedly robust economic data have eased concerns of an economic downturn, prompting markets to scale back expectations for rate cuts this year.

In fact, some analysts are now predicting the Fed will raise rates later this year as a rebounding economy tightens demand and puts pressure on prices.

Federal funds futures contracts imply the likelihood of the Fed holding steady for most of 2007. Meanwhile, yields on benchmark 10-year Treasury bonds have risen above 4.8% from around 4.4% in early December.

Another focus may be whether the FOMC will decide by unanimous vote to keep rates steady, as four-time dissenter Richmond Federal Reserve Bank President Jeffrey Lacker will not be among the voting members this year in the annual rotation of voting regional Fed bank presidents.

Factors to Consider

Here are some factors that policy-makers are likely considering:

* Economic data for December was mostly robust, allaying concerns about some soft economic sectors.

* U.S. industrial production gained a stronger-than-expected 0.4% in December, showing output had held up late last year.

* New orders for U.S.-made durable goods rose 3.1% in December. Excluding volatile transportation orders, durable goods orders rose 2.3% in December following two monthly declines.

* New-home sales rose 4.8% in December to an annual pace of 1.12 million units.

* Labor market remained tight. The Labor Department said 167,000 jobs were created in December and also revised up hiring for each of the two preceding months. The unemployment rate in December was 4.5%, unchanged from November. December jobs data will be released on Friday, with a median forecast for an increase of 149,000 in non-farm payrolls.

* Core inflation remained tame, and oil prices briefly fell below $50 a barrel. Over the 12 months through November, the price index for personal consumption expenditures excluding food and energy eased to 2.2%, its lowest since May.

* Core consumer prices rose 0.2% in December, as expected. Year-over-year, the index gained 2.6%, matching the November increase

* Consumer confidence index rose to 110.3 in January from an upwardly revised 110.0 reading in December.

* Fourth quarter GDP will be released on Wednesday. Economists polled by Reuters forecast the economy grew at a 3% annual rate in the fourth quarter, rising from the 2% growth pace of the previous quarter.

* U.S. manufacturing activity probably expanded at a slightly faster pace in January from December. The Institute for Supply Management's manufacturing index is expected to rise 51.9 in January from 51.4 in December, the median forecast in a Reuters survey showed. The data will be released on Thursday.

What the Fed Has Said

* Minutes from the FOMC meeting on Dec 12 showed inflation was the predominant concern among policy-makers, although some expressed concerns about the "subdued tone" of some indicators.

* Fed policy-makers seemed to indicate interest rates will remain steady. On Jan. 11, Fed Governor Susan Bies said the U.S. economy, outside the soft housing and automobile sectors, was "moving along at a very, very healthy pace."

* Fed Vice Chairman Donald Kohn said on Jan. 8 that while a gradual decline in core inflation was likely, that path was still by no means assured.

* The Fed's Beige Book released on Jan. 17 said the pace of U.S. economic activity grew modestly as 2006 was ending.