U.S. stocks could extend their rally and the Dow industrials <.DJI> may climb above 10,000 this week, should the Fed's policy-makers and economic data support the view the economy is recovering from recession.

The Federal Open Market Committee will meet on Tuesday and Wednesday, with investors anxiously awaiting the policy-makers' assessment of whether the economy is improving.

The week's key economic data will include U.S. existing home sales, new home sales, a report on new orders of durable goods such as washing machines and refrigerators, and a final reading for September on consumer sentiment -- all likely to put the expectations for recovery to the test.

A raft of initial public offerings are also expected to price, making it the biggest week for initial public offerings in the United States in nearly two years in a sign of growing confidence in the market.

The Standard & Poor's 500 Index <.SPX> has staged a six-month climb from a 12-year closing low, rising 58 percent. The rally has fed on expectations of a rebound from recession coupled with cheap money that has flooded roughly every market.

The market has obviously had a nice run with a combination of hopes for second-half recovery and a very easy Fed policy, said Peter Boockvar, an equity strategist at Miller Tabak & Co in New York.

The Fed is expected to acknowledge a batch of recent economic data pointing to a fledgling recovery. The FOMC's policy statement, due about 2:15 p.m. EDT on Wednesday at the end of the two-day meeting, will come about a week after Federal Reserve Chairman Ben Bernanke's comments that the U.S. recession was very likely over.

But Bernanke also said the recovery would be slow and it would take time to create new jobs.

We're seeing investors that were really direly pessimistic move the meter to slightly more optimistic, and that is confirmed with each little piece of economic data, said Fred Dickson, market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

That optimism has translated into an extension of the rally in stocks. For the week, the Dow rose 2.24 percent, capping its best week in two months. The Standard & Poor's 500 index <.SPX> gained 2.45 percent and the Nasdaq added <.IXIC> 2.50 percent.

Investors are wondering whether interest rates will remain at record lows for a period of time and whether the economic recovery will remain on track.

We get both those questions answered partially (this) week, Boockvar said, referring to the FOMC meeting and key data including the index of leading U.S. economic indicators and durable goods.

STEADY FED

Central banks around the world have begun debating how, and more importantly when, to phase out the emergency steps taken to contain the worst global financial crisis in decades. Most are not expected to do so until well into 2010.

The Fed has already announced they're going to halt the purchases of Treasuries, Boockvar said. The real exit strategy is (normalizing) the Fed funds rate, and they are not close to doing that.

A Reuters poll released on Wednesday showed economists expect the Fed to hold rates steady until the third quarter of next year. It also showed expectations the U.S. economy will make a more robust recovery from recession than expected a month ago.

The market is expecting a very sharp rebound from the recession, said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey. He said people will closely watch the Fed's take on what comes for the economy after the rebound.

The Fed's and other central banks' strategies also will be part of the discussion during a two-day G20 summit in Pittsburgh, starting Thursday.

Bankers' pay and other financial regulations will also be examined.

DURABLE GOODS IN SPOTLIGHT

On the macro front, the main event is set for Friday with the release of August durable goods orders, forecast to rise 0.5 percent, according to economists polled by Reuters.

The new orders component of the ISM survey has been very strong, Prudential International's Praveen said. People are looking for validation (of the improved sentiment) in the durable goods data.

Sales of existing or used homes, due on Thursday, are expected to show a rise to an annual rate of 5.35 million units in August, from July's rate of 5.24 million, according to the Reuters poll. New home sales for August, due on Friday, are expected to increase to an annual rate of about 440,000 from July's rate of 433,000.

Stronger home sales will be viewed as an expected continuation of the improvement in the housing market, Praveen said.

On Monday, the Conference Board, a private research group based in New York, will release its index of leading indicators for August at 10 a.m. EDT (1400 GMT). Economists polled by Reuters expect a 0.7 percent increase, compared with a previous gain of 0.6 percent.

IPOS AS QUARTER WINDS DOWN

On the IPO front, there are eight deals on deck, which are expected to raise $3.5 billion. That would increase 2009's total so far by 66.1 percent. The IPOs run the gamut from real estate investment trusts created to buy toxic assets to a clean tech company that has never made a profit.

The last full week of the third quarter could also see fund managers starting to change their asset allocations, a move that could further boost the stock market.

Let's be ready for some quarter-end asset allocation moves -- from cash and bonds to equities, said D.A. Davidson's Dickson.

And as a coda to the earnings season, the highlights of the week will include quarterly scorecards from ConAgra Foods Inc , Bed Bath & Beyond Inc , General Mills Inc , Rite Aid Corp and KB Home .

(Additional reporting by Caroline Valetkevitch; Editing by Jan Paschal)

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