LOS ANGELES (MarketWatch) — The Federal Reserve will meet this week, and with the consensus that it will keep its ultra-loose monetary policy in place at least through year’s end, a hint that stimulus measures will be tapered sooner than later could trigger a downshift in U.S. stocks.

Analysts say the central bank is wary of creating turmoil for markets, and expect the Fed to largely stick to its script this week, which would result in bond yields remaining in ranges and gold clinging to a recent downtrend.

“The Fed understands this is a touchy subject...and at some point, they have to put their foot off the gas. The key will be how they do it, how they signal it,” said Matthew Tuttle, chief investment officer at Tuttle Wealth Management LLC.

Talk that the Fed will possibly slow the pace of bond purchases has been steady since policy makers are set this week to debate the asset purchase program, and as investors have received a slate of improving economic data.

The rate-setting Federal Open Market Committee will gather for a two-day meeting that ends Wednesday. It is expected to keep interest rates near zero, where they’ve been since December 2008. It’s also expected to continue its quantitative easing program of buying $85 billion a month in Treasury and mortgage debt, “especially with sequester layoffs a reasonable consensus forecast,” analysts at Credit Suisse told clients late last week.

“The Fed told us they want asset values to go up, stock prices and housing prices to go up, and that’s one of the main goals of QE and that’s working,” said Scott Wren, senior equity strategist at Wells Fargo Advisors.

With the Fed having just announced in December the expansion of asset purchases by $45 billion a month, and as risks including high U.S. employment remain, it would be “perceived as an erratic move” by the Fed to signal it will back off its strategy, Wren said.

Minutes from the Fed’s January meeting showed many Fed officials are worried that the bond buying, along with the low interest rates, are setting the stage for higher inflation and overheating in some markets.

Wren expects Bernanke to continue to reassure investors that he backs asset purchases, and “that’s been a big part, I think, of this rally we’ve seen.”

This month benchmark equity indexes have shined. Last week, the Dow Jones Industrial Average DJIA, +0.13% hit record highs and logged its fourth week of gain. The S&P 500 index SPX, -0.46% and the Nasdaq Composite Index COMP, -1.25% each notched their third week of advances.

Friday saw the first losing session for the Dow this month, and all three indexes closed slightly lower.

The Fed will release a statement on Wednesday at 2 p.m. Eastern time, and at 2:30 p.m. Eastern, Federal Reserve Chairman Ben Bernanke will hold a press conference.

If the Fed were to give any indication that it’s mulling changes in policy, “you’d get the pullback [in stocks] right away. The market would not respond favorably to that at all,” said Wren.

Stocks: ‘Finger on the ‘sell’ button’

At this point in the equity rally “you’ve got people who have their finger on the ‘sell’ button just waiting,” to push it if the Fed were to hint at increased dissent or anything outside of the consensus for quantitative easing, said Tuttle.

Europe week ahead: U.K. budget

“You’ve got everybody expecting a short-term correction that could become a self-fulfilling prophesy pretty quickly,” he said, adding that investors could see a sell-off of about 150 points in the Dow in the short-run.

Tuttle said his shop is about 50% fully invested, with the other half sitting in cash waiting to get into equities at lower levels, “which I would not be surprised if we’re doing that next week.”

For financial stocks in particular, improving economic fundamentals are bullish, said Tuttle. “If I were a sector investor, which I’m not, that would be the sector I would be going into in a big way.”

The Financial Select Sector SPDR XLF, +1.13% has jumped nearly 13% this year, and is up more than 17% over the last 12 months.

But Wren of Wells Fargo Advisors said his team been underweight the financial sector in light of its solid run higher and as risks including mild loan demand remain. He said they are overweight the consumer discretionary, materials and technology sectors as they are sensitive to any continuation in economic recovery.

Gold: Good news is no good

The precious metal CLJ23, has recently been in a downtrend as equities have been at the center of the market’s attention, said Tuttle. While easy-money monetary policies can fan inflation fears—a benefit to gold—improving economic data in the U.S., including in the housing sector, have helped dent gold’s safe-haven investment appeal. Gold futures in February marked its fifth month of losses.

Next week, the market will receive new housing data, starting with the home builders’ index on Monday. The February housing starts report is due Tuesday, and reports on home prices and existing home sales will arrive Thursday.

“Shorter-term, I don’t like gold,” which has been facing improving economic data and strengthening in the U.S. dollar, said Tuttle. He foresees gold futures falling to $1,335 an ounce. Gold finished Friday’s session up a modest 0.1% at $1,592.60 an ounce. The SPDR Gold Trust GLD, +0.28% exchange-traded fund is on its second straight week of gains, but is still down about 5% year-to-date.

However, Tuttle said gold has favorable longer-term prospects in government implementation of austerity programs and the possibility that quantitative easing will be held for a longer period of time because of slowing growth.

Treasurys: On alert to bond buys’ end

Should the Fed deliver a more hawkish statement or indicate greater consideration of taper of its third round of quantitative easing, “then I think there’s a greater potential for upside in Treasury yields,” said John Canavan, a bond market analyst at Stone & McCarthy Research Associates.

Treasury yields and prices move in opposite directions.

Canavan said he’s recently been seeing a bid develop for 30-year Treasurys US:30_YEAR at a yield around 3.25%, and for 10-year notes US:10_YEAR at a yield around 2.05%.

But Canavan doesn’t expect to hear the Fed talk of any major shift this week. There’s been strength in economic figures as of late, he said, but they’re coming off flat economic growth in the fourth quarter “and indications for future growth is still an open question for the Fed as well as for market participants,” he said.

If there’s no indication of changes at the Fed, bond yields will likely be stuck in ranges, with the 10-year yield bouncing between 1.90% and 2.10%.

“If the Fed did offer any indication they were any way closer to tapering purchases, which we expect would be their first step, then I think we’d be more likely to see the 10-year [yield] rise above 2.10%.”