Source: The Canadian Press

This week, the U.S. Federal Reserve will likely set the tone for markets for the rest of the year when it holds its scheduled meeting on interest rates.

And as in other Fed rate meetings this year, there isn’t any doubt that it will continue to hold the line on rates when it makes the Tuesday announcement.

But investors will anxiously scan the accompanying statement for the Fed’s latest take on the U.S. economy, particularly in light of the agreement reached last week to extend a raft of Bush-era tax cuts and unemployment benefits.

The Toronto stock market closed higher last week, leaving the TSX up almost 13 per cent year to date, led by strong gains in gold and base metal companies. The primary market mover was an agreement that would see Bush-era tax cuts and unemployment benefits extended.

Economists expect the tax package to lead to stronger growth in the U.S. economy. Goldman Sachs estimates it could add between 0.5 and one percentage point to economic growth in 2011.

“So you’re seeing forecasts getting revised up for 2011 by about a percentage point,” said John Johnston, chief strategist, The Harbour Group, RBC Dominion Securities.

“Forecasts for 2011 are getting revised up as a result of the fiscal package. So the Fed will be maybe sticking up their forecast a bit.”

Investors are interested in how this bullish point of view meshes with the Fed’s current program of quantitative easing, a massive US$600 billion program of stimulus that sees the central bank buying up bonds by greatly inflating the supply of dollars.

And they’re looking for any indication that the Fed may decide to end the program before mid-2011 because of an improving economy.

“Fiscal policy is helping the Fed out,” added Johnston.

“There’s some concerns that it would end early because you have some new people voting on the panel this year. I would expect they aren’t going to do anything but people will be looking to sharpen the probabilities of it ending earlier or later.”

The other major economic event of the week also happens on Tuesday — the release of U.S. retail sales for November.

“A lot of people use these retail sales data very closely and it can be a real market mover,” said Johnston.

“The backdrop for the consumer is the labour market has been improving a bit, they’ve done a good job at increasing their saving rate to a point where if they run on autopilot, now, they will have fixed their balance sheets in three to five years. So there’s room for the consumer to do better than many people think, not great, not a leader of economic growth but certainly a participant.”

Economists expect sales were up 0.6 per cent during November following a 1.2 per cent rise during October.

Investors were hopeful ahead of that retail data after data was released Friday showing that the widely-watched University of Michigan consumer sentiment index reached its highest level since June.

The index climbed to 74.2 in early December from 71.6 in November. Economists had expected a December reading of 72.9.