NEW YORK (Reuters) - Not too hot, not too cold - just right. That is what Wall Street hopes will be the Federal Reserve's assessment of the economic outlook this week when it concludes its final policy meeting of 2009.

The Fed will be in focus as investors wrestle with signs that the economic recovery is gaining strength, possibly pushing capital markets closer to a time when the Fed has to contemplate scaling back some of its accommodative measures.

Stocks should hold in a narrow range until the Fed releases its statement on Wednesday at the end of a two-day policy meeting, analysts said.

"I think people will probably look closely at any little nuance to support either the bull or bear camp, whichever one they reside in," said Rick Bensignor, chief market strategist for Execution LLC, an agency-only broker dealer in New York.

"I am not expecting a huge change in what the Fed tells us, and I suspect, in general, rates are likely to stay where they are."

Indeed, Fed Chairman Ben Bernanke reiterated as recently as last week that rates would stay low for "an extended period", but some investors are taking no chances, opting to hedge their bets following recent strength in the US dollar and upbeat economic reports.

At its policy meeting the Fed faces the tricky task of acknowledging a pick-up in economic activity without spooking fragile markets into believing interest rate hikes are imminent. The fed funds rate is expected to remain at the current zero to 0.25 percent range.

The near-zero interest-rate policy has allowed investors to borrow dollars cheaply in order to invest in higher-yielding assets like stocks, sending the benchmark S&P 500 index up 63.5 percent from the 12-year closing low of March 9.

Although investors continue to have the appetite for riskier bets, the inverse correlation between stocks and the dollar that has been apparent since March has started to show signs of moderating.

For a long time, stocks have risen as the dollar fell, and vice versa, as investors rode the wave of the so-called dollar carry trade.

The recent bounce in the greenback has caused a reassessment of that strategy, analysts said. The dollar's latest bounce was sparked by a surprisingly upbeat November non-farm payrolls, a report that has subsequently been followed by even more reassuring data, including Friday's stronger-than-expected November retail sales and December consumer sentiment.

Even so, the stock market has made very little headway as investors fret about the outlook for monetary policy. The S&P 500 is up 0.6 percent since the November jobs report. For last week, the Dow rose 0.8 percent, the S&P was little changed and the Nasdaq shed 0.2 percent.

This week's economic data includes November industrial production, leading indicators and housing starts. Analysts expect the reports to reinforce expectations that the economy would avoid slipping back into recession even with the unemployment rate at 10 percent - a 26-year high.

Industrial production numbers are set for release tomorrow, along with the November Producer Price Index; housing starts are due Wednesday, along with a reading on the November Consumer Price Index.

Leading indicators, a gauge of the US economy's prospects, are due on Thursday, along with weekly jobless claims and a survey of factory activity in the US mid-Atlantic region.

"We'll probably see that the data indicates that the economy is growing faster than the market expected. I think it's going to be good news," said Peter Cardillo, chief market economist at Avalon Partners in New York.

Even so, "the dollar is capping the market from moving much higher," he added.

For the bulls, the data and the Fed's pledge to keep interest rates low might provide a spur to propel stocks to new 15-month highs, along with a push by some investors to play catch up.

But if recent consolidation and sideways drift since November is any indication, some investors might see the last few weeks of 2009 as an opportune time to book profits ahead of the new year.

In Friday's session, the Dow and S&P 500 ended up following stronger-than-expected retail sales and consumer sentiment data, but dollar strength spurred some investors to sell recent winners on the technology front, sending the Nasdaq lower.

"There's pretty good reason for profit-taking going into year-end," said Bob Browne, who oversees the management of $611 billion of assets as chief investment officer at Northern Trust Global Investments in Chicago.

"We're still concerned about the dollar in the long run, but in the short term we can easily see this (dollar advance) running a bit further."

This week's earnings scoreboard features Best Buy Co Inc., the top US electronics retail chain, due to report tomorrow, and package delivery company FedEx Corp., which is scheduled to report on Thursday, along with Nike Inc and Oracle Corp.