There is little doubt that by the time Ben Bernanke concludes his first rate-setting Federal Reserve meeting Tuesday, the bank will have approved its 15th consecutive interest rate increase. Investors will be waiting not for what the Fed does, but what it says.
Futures markets are pricing in another quarter-point rate increase, bringing the federal funds rate to 4.75 percent, and expect another at the Fed's next meeting in May.
Recent speeches by Fed policy-makers give the impression that while the Fed is broadly comfortable with recent inflation readings, inflation risks remain the primary focus of the policy-making Federal Open Market Committee.
There are some concerns that capacity constraints may cause inflation pressures, and that high energy prices may push up core inflation further. But its risk management approach suggests it is prudent to continue to lean against a rise in inflation expectations.
After its January meeting, the FOMC said "some further policy firming may be needed" to keep risks to attaining sustainable growth and price stability in balance.
Fed-watchers say this forward-looking language may be repeated or toned down a little. But the Fed's meeting will also give the committee time to discuss a more extensive overhaul of the statement.
"We think the Fed will retain some kind of tightening bias statement until it feels confident that the inflation threat is over," Lehman Brothers said in a note to clients.
Recent data point to strong economic growth in the first three months of the year, following a weak first quarter. Taking the six-month period as a whole, the economy is growing in the 3-3½ percent range commonly used to describe its sustainable trend rate.
Inflation data, meanwhile, suggest that while the rate of increase for core prices, excluding food and energy, is at the top of the range the Fed likes to see, no acceleration is under way.
In the 12 months to February, the core personal consumption expenditures index rose 1.8 percent.
While a slowdown in the housing market appears to be under way, there are signs of strength.
The Fed's benchmark view is that the housing slowdown will lead to a moderation of consumer spending growth that will underpin an expected mild slowdown in economic growth and slightly lower inflation next year.
A bigger-than-expected impact on consumer spending is a risk to the outlook.
In the February monetary policy report to Congress, the consensus forecast of FOMC members was for growth of about 3½ percent in 2006 and 3-3½ percent in 2007. Inflation was expected to be about 2 percent this year and 1¾-2 percent next.
The Fed has stressed that interest rate decisions will be driven by the data at a time when the federal funds rate is either at or above the "neutral rate" at which monetary policy is not stimulating or restricting growth.
The yield on the 10-year Treasury note, at just over 4.6 percent, is barely higher than when the Fed embarked on its course of raising rates in 2004.
In a speech last week in which he tackled the low level of long-term interest rates, Bernanke dismissed fears that the flat yield curve was pointing to a sharp and imminent slowdown in the economy.
