By Akane Otani 

The Federal Reserve will conclude its final policy meeting of the year Wednesday. With traders widely expecting the central bank to raise short-term interest rates, many say the focus will be on Fed officials' comments on the economy. Volatile markets and mixed inflation data have amplified investors' doubts about how many times the Fed can raise rates next year. Also fueling the hesitation are remarks by Chairman Jerome Powell, who said in November that rates looked like they were "just below" neutral, a level that would neither speed nor hamper economic growth.

The result: Many traders have begun pricing in a more gradual course of rate increases for 2019.

The winding down of rate expectations has coincided with a sharp drop in oil prices. While higher oil prices can lead to higher inflation, pushing the Fed to move faster with its rate increases, weak commodities markets can do the opposite.

In another sign investors are pricing in less inflation ahead, funds focused on Treasury inflation-protected securities -- essentially a safeguard against rising prices -- have suffered outflows. That marks a reversal from the start of 2018.

Not all parts of the markets have lost ground this quarter. Doubts about the trajectory of the U.S. economy and monetary policy have helped drive fresh money into utilities shares, whose dividend payouts look more attractive to investors when they are less optimistic about growth.

Home buyers have also gotten a bit of a reprieve as mortgage rates, which hit their highest level in more than seven years in October, have fallen with Treasury yields. That is good news for economists who have worried that the housing sector will face increasing pressure as rates rise.

Still, many investors say that, even with the possibility of a more gradual rate path, they remain cautious heading into 2019. The yield curve, the gap between two- and 10-year Treasury yields, has continued to flatten in the fourth quarter. Historically, that has signaled trouble ahead for the U.S. economy.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

December 15, 2018 07:14 ET (12:14 GMT)