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Fed meets Tuesday, expected to keep policy steady

Stay the course. That's the message economists expect the Federal Reserve to deliver at the Federal Open Market Committee meeting Tuesday. 

"Steady as she goes," said Lawrence J. White, professor of economics at New York University's Stern School of Business. "It's not a time to be doing any major new initiatives but not yet a time to be tightening up."

The Fed is likely to reiterate observations made by chairman Ben Bernanke when he addressed Congress in January: Employment is recovering faster than anticipated, but the housing market is still in the dumps, and it's not clear that demand has recovered enough to propel continued expansion of the jobs market. "The fundamentals that support spending continue to be weak," he said.

There's also the wild card of oil prices, Mitchell O. Goldberg, president of ClientFirst Strategy Inc., points out. The mild winter experienced by wide swaths of the country combined with the low price of natural gas gave Americans a break on their heating bills. If the price of oil continues to rise, however, it could act as a brake on the recovery's momentum and cancel out better-than-expected employment numbers.

Europe's economic trouble could also throw a wrench into the recovery's momentum. "The risk of economic turmoil in Europe remains despite the current agreement on Greek debt," Joerg Dittmer, senior analyst at Frost & Sullivan, said via email. "Economic difficulties in Europe would impact the United States through reduced demand for our exports."

Above all, the Fed wants to avoid excessive optimism; it applauded the appearance of so-called green shoots in the past, only to watch the economy falter in subsequent months. 

People looking for movement on interest rates are likely to be disappointed. The Fed isn't expected to budge from its commitment to keep rates at historic lows through 2014. Inflation isn't a problem. If the economy were to bounce back suddenly, "There are other tools that the Fed can use besides raising their target rate to tamp down inflation," Goldberg said.

"They could raise bank reserve requirements. They could push lending standards to be more stringent. They could let maturing assets on their balance sheet mature without being replaced," he said. 

White said the Fed will probably let its "Operation Twist" wind down later this year as planned, and is unlikely to announce any further actions to increase the money supply. 

The Fed's other big announcement this week will be the results of its most recent round of bank stress tests. "Overall, every indication is that it will show a stronger industry than three years ago," said banking consultant Bert Ely. "That's what we'd expect because there's been lot of capital building and cleaning up of problems on bank balance sheets."

Now that the industry as a whole recovering, though, it will put more of a spotlight on banks that are still struggling.