What the Fed's considering at this week's meeting

NEW YORK (Reuters) - The Federal Reserve meets this week, faced with a darkening U.S. economic backdrop, and is expected to focus on how best to use the policy arsenal at its disposal with its most ambitious emergency lending program to date about to launched.

Economists expect the U.S. central bank to hold its target range for the benchmark overnight federal funds rate steady at zero to 0.25 percent, while indicating it will keep rates low for some time. Some expect the Fed to stress that it will ramp up the use of its balance sheet to support key credit markets.

As the meeting starts on Tuesday, the New York Federal Reserve Bank will begin accepting applications for the first batch of loans under the Term Asset-Backed Securities Loan Facility (TALF), which seeks to ease consumer and small business lending.

The program will start at an initial $200 billion, but the Fed has said it could be expanded to up to $1 trillion.

Markets will scour the Fed's post-meeting statement for any clues as to how the central bank may expand its credit-easing policies, including any further hints on whether it might be moving toward -- or away from -- buying long-term U.S. government debt.

The Fed is expected to issue its policy statement around 2:15 p.m. EDT on Wednesday.

Following are some of the factors policy-makers are considering:

ECONOMY

Federal Reserve Chairman Ben Bernanke said on Sunday that the United States should start recovering from recession next year if there is political will to finish the costly rescue of its shattered banking system.

The following are some recent data points on the economy:

-- The U.S. unemployment rate rose to a 25-year high of 8.1 percent in February as employers, buckling under the strain of a severe recession, axed 651,000 jobs.

-- The economy suffered its deepest contraction since early 1982 in the fourth quarter, shrinking at a much worse-than-expected 6.2 percent annual rate as exports plunged and consumers slashed spending.

-- U.S. consumer sentiment as measured by the Reuters/University of Michigan index unexpectedly rose to 56.6 in early March from a reading of 56.3 in late February.

FINANCIALS

-- Since the Fed's last meeting in January, the U.S. has stepped in with a revamped rescue for insurer American International Group. As part of that rescue, the Federal Reserve took a preferred interest in two AIG units.

-- Executives from Citigroup (C.N), Bank of America (BAC.N) and JPMorgan Chase (JPM.N) said last week their banks had been profitable for the first two months of the year.

UNCONVENTIONAL TOOLS

-- The first applications for loans under the Term Asset-Backed Securities Loan Facility are due this week, and markets will be eager for more details on how this facility could be expanded. The Fed has said the program, aimed at spurring consumer and small business lending, could expand to include other asset classes such as commercial mortgage-backed securities.

-- The Fed could also announce an expansion to its existing $100 billion agency debt and $500 billion mortgage-backed securities purchase programs. The Fed has bought about $46.5 billion of agency debt and approximately $217 billion of agency MBS so far.

-- The Fed has said buying U.S. government bonds could also be an option, though some policy-makers have sounded cool to the idea in recent weeks. Market participants will be eager for any further clues on whether the Fed will step in as a buyer.

(Reporting by Kristina Cooke; editing by Gary Crosse)