NEW YORK • The Federal Reserve could be key for Wall Street this week as investors get to hear from the U.S. central bank for the first time since a series of moves by its global peers.
Thursday's larger-than-expected stimulus package from the European Central Bank lifted U.S. stocks, helping indexes post gains for the week after three straight weeks of losses.
But the increased stimulus measures from the ECB and elsewhere globally, including the Bank of Canada, may make it tougher for the Fed to move ahead with its own plan to start raising interest rates by midyear.
"Global central policy is not one of their mandates, but I think they have to acknowledge it, because this is not just global economic headwinds, this is actually the moves of other central banks. They've got to take that into account," said Erik Davidson, chief investment officer for Well Fargo Private Bank in San Francisco.
Should the United States raise rates when other major developed economies are being more expansive, that could boost the dollar, putting further pressure on commodity prices — which because they are denominated in dollars become more expensive for non-U.S. investors — and adding to the threat of deflation.
The Fed is expected to reiterate that those global risks have not yet put the U.S. recovery or the Fed's rate plans off track when it issues its policy statement at the close of its two-day meeting on Wednesday.
The timing of the Fed's eventual rate move has been a top concern for investors. Stocks rallied when the Fed said after its December meeting that it would take a patient approach toward raising interest rates and gave an upbeat assessment of the U.S. economy.
The sharp decline in oil prices that began last June and worries about deflation could keep the Fed on hold for longer, analysts said.
"It bodes well for the Fed to be patient," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "There's no inflation here; the problem is deflation. If oil prices were to go lower, that could create more of a problem."
More money has been moving from the U.S. market into European stocks as a result of the ECB measures, adding to concerns for U.S. stock investors.
Sharp declines in the euro, which hit an 11-year low against the dollar on Friday, make European stocks cheaper, especially compared with U.S. equities.
Investors are also watching elections Sunday in Greece. With the leftist Syriza party — which has pledged to scrap austerity measures and secure a debt write-off — leading in polls, the euro may see further pressure.
Underpinning the argument for U.S. stocks, though, is the growing strength of the U.S. economy while overseas economies have been weakening.
"European equities will likely improve in the short term, but in the medium term equity performance is likely to be tied to the performance of the real economy," Rob Waldner, chief strategist at Invesco, wrote in a note last week.
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