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Fed set to remain on pause as GDP data expected to show slowdown

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Federal Reserve Chairwoman Janet Yellen supports a rate hike this year

The U.S. economy has looked shaky of late, and an expected weak reading on third-quarter gross domestic product should confirm that. As a result, the Federal Reserve is again expected to keep interest rates near zero.

The Fed decision, due Wednesday, and the GDP report, coming Thursday, will take center stage this week.

“Weak data and continued economic uncertainties at home and abroad mean a data dependent Fed is currently stuck with zero rates, no matter how little it might like that,” said Paul Mortimer-Lee, chief economist North America at BNP Paribas.

The big question is whether the Fed will hint at a December move.

“The policy statement verbiage will be analyzed to death for clues as to the likelihood of a move in mid-December,” said Josh Shapiro, chief U.S. economist at MFR Inc.

But analysts aren’t expecting many clues.

“The FOMC has tried to dissuade markets from expecting any explicit signals about upcoming policy changes, emphasizing data dependence. As such, we anticipate no meaningful changes to the policy guidance language,” said Michael Hanson, senior economist at Bank of America Merrill Lynch.

That doesn’t mean the Fed won’t hike in December, it just means the committee is keeping its options open, he said. In September, 13 of 17 Fed officials backed a rate hike before the end of the year.

Whether the Fed can move depends critically on incoming data, especially the October and November employment reports that will come in prior to the Fed’s December meeting.

The Fed wants to see more labor market strength so it can be reasonably confident inflation is moving higher.

The U.S. central bank will get a slew of new economic reports that could factor into a December move.

Analysts polled by MarketWatch predict gross domestic product decelerated to 2.1% in the third quarter from 3.9% growth in the second quarter.

Some economists said the report could look deceptively weak, as some of the weakness will come from an expected inventory correction.

Final sales, which strips out inventory behavior, are expected to be firm on strong consumer spending.

But others see the third-quarter GDP as a harbinger of slower growth to come.

Other key data points are the employment cost index, a good proxy of wage gains, which is expected to firm in the third quarter. Higher wage gains would give the Fed confidence inflation might be around the corner.

On the other hand, durable-goods orders are expected to drop for the second straight month in September, another sign that global woes and the strong dollar are crimping U.S. manufacturing.

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