The U.S. Federal Reserve began a two-day meeting on Tuesday that is expected to end with a nod to an improved economic outlook but no change in course on its $600 billion bond-buying plan.

The Fed's policy-setting Federal Open Market Committee opened its first meeting of the year at 1 p.m. (1800 GMT), a central bank official said. It is expected to release a statement outlining its views on the economy and monetary policy at around 2:15 p.m. (1915 GMT) on Wednesday.

Financial markets will watch carefully for any hint the Fed plans to extend or truncate its bond buying program.

The U.S. economy built momentum as last year drew to a close. A report on Tuesday showed a surprisingly large gain in consumer confidence in January and data on Friday is expected to show the economy expanded at a 3.5 percent clip in the fourth quarter, up from the third quarter's 2.6 percent pace.

However, unemployment is stuck above 9 percent and inflation is still lower than the Fed would like.

It will take note of the modest improvement in economic activity, although I suspect it will also highlight that the labor market has yet to participate, said Paul Dales, senior U.S. economist at Capital Economics in Toronto.

The Fed chopped rates to near zero in December 2008, and then bought longer-term securities worth $1.7 trillion to provide additional stimulus to the economy. It renewed bond-buying late in 2010 after the recovery faltered.

The program has been controversial within the Fed and without. Kansas City Fed President Thomas Hoenig voted against the policy decision at every FOMC meeting last year.

This year, Hoenig is no longer a voter but Philadelphia Fed leader Charles Plosser and Dallas Fed chief Richard Fisher come into the voting rotation and are seen as possible dissenters.

Markets will look for whether the Fed upgrades its characterization of the U.S. recovery, which it said in December was continuing. Observers will also watch for any change in how it describes underlying inflation, which it said last time continued to trend downward.

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