The Federal Reserve is expected to give a nod to signs the U.S. recession is waning but will likely warn that the recovery will be slow and dampen any expectations it will soon start to raise interest rates.

The Fed's policy-setting committee, which meets on Tuesday and Wednesday, is expected to hold its benchmark overnight rate in a range of zero to 0.25 percent. A statement on the decision is due about 2:15 p.m. EDT on Wednesday.

The markets have begun pricing in a near-term increase in interest rates. That is extremely unlikely. The Fed is going to want to discourage that, said former Fed Governor Lyle Gramley.

The Fed is likely to decide to let its $300 billion Treasury purchase program expire, as scheduled, in September. Fourteen out of 16 primary dealers polled by Reuters last week said they expect the Fed not to extend the controversial program.

The central bank may debate whether to extend a program that supports financing for commercial real estate, however, given the steep drop in commercial property prices that could prove a stumbling block for a nascent recovery.

ECONOMY

There have been signs the deepest recession since the Great Depression may be coming to an end.

--Gross domestic product, which measures total goods and services output within U.S. borders, fell at a 1.0 percent annual rate in the second quarter, according to the Commerce Department, after tumbling 6.4 percent in the January-March quarter.

--The Blue Chip Economic Indicators survey of private economists showed about 90 percent of respondents surveyed believe the economic downturn will be declared over in the third quarter.

--Sales of new single-family homes in the United States rose 11 percent in June, the largest monthly rise since 2000, while the inventory of homes for sale fell to an 11-year low, according to the Commerce Department.

--U.S. employers cut 247,000 jobs in July, far less than expected and the least in any month since last August. The unemployment rate eased to 9.4 percent in July from 9.5 percent the prior month, the Labor Department said, the first time the jobless rate had fallen since April 2008.

But risks remain and any recovery is likely to be slow, policymakers have warned in recent speeches.

--Many American households still face tattered finances after the loss of trillions of dollars of wealth through the drop in home prices and the stock market, Janet Yellen, president of the San Francisco Fed Bank, said in July.

The U.S. Conference Board's consumer sentiment index fell to 46.6 in July from 49.3 in June as the percentage of Americans saying jobs are hard to get increased.

--A number of policymakers point to the collapse in commercial real estate prices as potentially putting the recovery in jeopardy.

U.S. commercial real estate prices have fallen about 35 percent from their peak in October 2007 and are a major driver of banks' loan losses. About $2.2 trillion of U.S. commercial properties bought or refinanced since early 2004 have fallen below the price at which they changed hands, according to a report by Real Capital Analytics, a research firm based in New York.

--While financial market conditions have improved, credit availability will be constrained for some time to come, and this will serve to limit the pace of the recovery, William Dudley, president of the New York Fed Bank said in July.

INFLATION AND INTEREST RATES

--A key inflation gauge due on Friday is likely to signal overheating is no concern because there is still too much economic slack. Economists polled by Reuters think the U.S. consumer price index will be flat for July.

--Traders ramped up bets on Fed tightening after the stronger than expected July payrolls report but still don't expect a rate increase until the January or March FOMC meeting at the earliest.

UNCONVENTIONAL TOOLS

--Policymakers are likely to allow a plan to buy $300 billion of longer-dated Treasuries to end on schedule in September.

The Treasury purchase program was not effective in driving rates lower on a sustained basis and we believe any disruption caused by the impending end of the program is unlikely to be significant. An expansion, if undertaken, would likely increase concerns about inflation pressures, Drew Matus, economist at Bank of America Merrill Lynch wrote in a note to clients.

--The Fed may also discuss extending the life-span of the Term Asset-Backed Securities Loan Facility (TALF). The TALF started in March as a program to revive consumer and small business lending but has since been expanded to throw a lifeline to commercial real estate. It is scheduled to expire on December 31.

The TALF was created under emergency powers of the Fed's Board of Governors in Washington, as opposed to the policy-setting Federal Open Market Committee, which includes the 12 regional Fed bank presidents. This technical distinction, however, may not prevent a discussion of the TALF during the FOMC.

(Additional reporting by Ros Krasny; Editing by Kenneth Barry)

Inflation