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 Having weighed the economy's steady march toward full employment
against the backdrop of weak inflation and wage growth and
turbulence overseas, the U.S. central bank will issue its latest
rate decision at the end of a two-day policy meeting.
A rate hike would be the first in the United States in nearly a
decade. Fed watchers, however, see the outcome as a toss-up, with
Yellen's consistently stated desire to see workers reap more
benefits from the recovery, coupled with weak price rises and a
variety of global risks, looming large.
"It is a game-time decision. The key is what Yellen thinks and my
guess is that she will want to wait," said Mark Zandi, chief
economist for Moody's Analytics. "If you put yourself in her shoes,
you don't want to err by going too soon."
That's a mistake the European Central Bank made twice in 2011.
In addition to the release of the policy statement at 2 p.m. EDT
(1800 GMT), Fed policymakers also will issue a fresh set of economic
projections that will provide insight into the expected pace of
subsequent rate hikes and other key economic matters.
Yellen will hold a press conference shortly after.
 Investors, economists and analysts are broadly divided over whether
the Fed will decide to put more stock in continued U.S. growth,
pushing ahead with a rate hike, or defer to concerns about the
health of the global economy in delaying the rates "liftoff" until
October or December.
Financial markets have stabilized since an August bout of volatility
and concerns about an economic slowdown in China threw the U.S.
central bank off course from what seemed to be an inexorable move
toward a rate hike this week.
MARKETS UNCONVINCED
But for a Fed that likes to wear a "data-dependent" mantle, recent
U.S. economic numbers have provided little comfort in embarking on
the final turn away from the policies it embraced in the wake of the
2007-2009 financial crisis.
The unemployment rate plunged to 5.1 percent in August, a figure
arguably at or near the Fed's goal of full employment, and
historically out of line with a federal funds rate at near zero.
Consumer spending continues to hold up and Fed officials expect the
economy to continue to grow at a steady pace.
But a key measure of inflation fell last month, leaving the Fed far
from its other policy goal - a 2 percent inflation target - and
bolstering the case that there should be no rush to raise rates
until prices and wages begin to increase.
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Central bank policymakers for nearly a year now have said the impact
of a stronger U.S. dollar, falling global oil prices, and weak world
demand would fade, allowing inflation to rise towards their target.
They must now decide whether they have enough confidence in the
economy's underlying health, the state of financial markets and the
likely fallout from a rate hike to move forward. Either way, they
could trigger dissents from a group of policymakers adamant about
hiking rates now and another group equally keen to wait.
"A good argument for raising now is that everybody knows that a rate
increase is inevitable and speculation about the timing is creating
a lot of volatility. One way to reduce that is to end the guessing
game," said Ann Owen, an economics professor at Hamilton College in
Clinton, New York, and a former Fed economist.
Recent weeks have made the Fed's job harder. Markets that had priced
in a high probability of a September rate hike have now pushed that
expectation off to December or beyond.
Eighty economists in a recent Reuters poll were divided over whether
the Fed would hike rates on Thursday, with 45 expecting it to remain
on hold.
Traders on Wednesday saw a 29 percent chance the Fed would end its
near-zero interest rate policy at this week's meeting, based on
overnight indexed swaps rates; chances of a December hike stood at
83 percent.
(Reporting by Howard Schneider; Editing by Paul Simao)
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