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When US Federal Reserve policymakers last met in January it was amid violent market gyrations, warnings of a US recession and claims that the central bank could tear up its strategy for lifting interest rates.

The backdrop to this week’s meeting is far more benign. A steady stream of sturdy economic data and a recovery in financial markets have bolstered the arguments of those policymakers who favour interest rate rises later this year.

But the improvement in the climate only goes so far and divisions persist within the ranks of the rate-setters. As a result, economists overwhelmingly expect that when the Fed announces the result of this week’s meeting at 2pm Eastern Standard Time on Wednesday it will keep its key rate unchanged.

The Fed is likely to reduce the number of rate increases it predicts for the remainder of this year, as officials avoid giving overly hawkish signals.

“Our base case is that the Federal Open Market Committee will remain in tightening mode, although it should sound more cautious and bring down its expected pace of tightening from what it communicated in December,” said economist Roberto Perli of Cornerstone Macro, a consultancy.

What will happen at the meeting?

The central bank is likely to keep its benchmark — the target range for the federal fund rate — unchanged at 0.25 per cent to 0.5 per cent. Meanwhile, the median forecast of rate increases this year is likely to be trimmed back from four quarter-point rises to two or three.

The Fed’s assessment of the economy’s performance since it raised rates in December should be relatively sanguine. In her last public comments in February, Janet Yellen, Fed chair, reiterated her view that the US economy was likely to warrant gradual increases in short-term rates, even though at the time global turmoil had prompted traders to take rate increases off the table for the whole of 2016.

Since then, the Goldman Sachs financial conditions index, which measures factors such as equity prices, currency movements and credit spreads, has improved significantly, taking it back towards levels seen at the end of 2015, amid stronger stock prices and a softer dollar.

The jobs market has carried on improving, and there have been, in the words of Stanley Fischer, the Fed’s vice-chair, stirrings of inflation, as the core personal consumption expenditures price index rises 1.7 per cent year-on-year.

The Fed will want to keep alive the option of lifting rates again, even if it avoids giving definitive signals because of the uncertain backdrop.

What are the key messages to watch for?

The critical one is the Fed‘s statement — if any — of where it sees the balance of risks to the US economy. In January, the Fed decided the global situation was so murky it could not assess whether potential hazards outweighed the possibility of positive surprises. John Williams, the president of the San Francisco Fed, suggested this month that he would prefer to leave out this statement of risks again.

If, on the other hand, the Fed says that the upside and downside risks are balanced, it would put an upward move in rates on the table for as soon as the Fed’s April meeting — a hawkish outcome. If the risks are deemed “nearly” balanced that would also put markets on notice to expect a move in the coming months. But there will be officials arguing at the meeting that the risks have veered to the downside and that the Fed should be sitting on its hands for a good while.

A further issue to watch is how the Fed characterises inflation expectations, which have been very subdued, although the New York Fed’s latest poll this week revealed a bounce.

Where does the committee stand?

Ms Yellen needs to forge a consensus within a committee with sharply divergent views. Officials have been debating the risks still lurking overseas and in financial markets and how to balance, on the one hand, depressed inflation expectations, and, on the other, the possibility that inflation rises more than expected as unemployment continues its rapid fall.

On the dovish side of the debate are officials including Fed governor Lael Brainard, who stresses subdued inflation expectations and dangers from weak overseas growth. For her, the hazards of tightening policy when there is little room to reverse course if things go wrong are considerable.

On the other side are policymakers led by Mr Fischer, who emphasise the risk that an overly strong labour market could drive up inflation and force the central bank into an abrupt set of rate rises.

Mr Williams is also bullish, stressing that the US economy has gamely weathered intermittently ugly financial conditions for more than a year and a half and continued growing. While he doesn’t vote this year, his colleague Esther George of the Kansas City Fed does, and some analysts wonder if the hawkish Ms George could favour a rate increase in the March meeting.

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