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Fed meeting keeps world markets in check

LONDON Stocks edged higher Tuesday ahead of a two-day policy meeting of the U.S. Federal Reserve that could have a huge influence on how investors see the future path of the country's monetary policy.

For weeks now, markets have been gripped with uncertainty over whether the Fed will start reducing the amount of financial assets it is buying. For much of the past few years, the Fed's super-easy and super-cheap monetary policy has helped drive sentiment in the markets. Any reduction -- so-called tapering -- could spook investors who have been accustomed to seeing much of the money generated by the policy ending up in financial markets.

The uncertainty was caused by comments made by Fed chairman Ben Bernanke in May and investors will be hoping that a clearer line is evident at the end of this month's meeting on Wednesday. Though a change is not expected on Wednesday, investors will be looking for a clearer line in the accompanying Fed statement and in Bernanke's post-meeting press conference.

The nervousness surrounding the Fed was evident Monday when an opinion piece in the Financial Times about the Fed's intentions spooked investors and prompted some selling in U.S. markets.

"The entire sorry episode signifies how reliant on central bank stimulus markets have become," said Michael Hewson, senior market analyst at CMC Markets.

In Europe, the FTSE 100 index of leading British shares was up 0.9 percent at 6,384, while Germany's DAX rose 0.1 percent to 8,228. The CAC-40 in France was 0.1 percent higher too at 3,868.

Wall Street was poised for modest gains at the open, with Dow futures and the broader S&P 500 futures up 0.3 percent.

How Wall Street performs when it opens could also hinge on U.S. inflation numbers an hour before the bell. Inflationary pressures have been relatively benign in the U.S. so any sign that they are rising may impact upon expectations over the Fed -- one of the great fears over a monetary stimulus is that it may push up inflation in the long-run. The consensus in the markets is that the annual rate for May will rise to 1.4 percent from the previous month's 1.1 percent.

"Any signs that inflation is overheating would certainly add weight to calls for a tighter monetary policy to be implemented quickly," said Fawad Razaqzada, market strategist at GFT Markets.

The dollar's near-term outlook, particularly against the euro, rests on the Fed too. Europe's single currency was up 0.1 percent at $1.3381. Against the yen, the dollar has been buffeted by Japan's own monetary stimulus. Following recent losses, the dollar was back in favor, trading 0.9 percent higher at 95.37 yen.

Earlier in Asia, Japan's Nikkei stock average shed early gains to fall 0.2 percent to 13,007.28. Trading volume was the lowest for the year. Elsewhere, Hong Kong's Hang Seng index was nearly flat at 21,225.88, while South Korea's KOSPI index gained 0.9 percent at 1,900.62.

Oil prices fell ahead of the Fed's meeting, with the benchmark New York rate down 23 cents at $97.54. The contract fell 8 cents to finish at $97.77 a barrel on the Nymex on Monday.

In currencies, the euro rose to $1.3388 from $1.3340 late Monday in New York. The dollar rose to 95.11 yen from 94.86 yen.

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