The impact of yesterday’s surprise PBOC stimulus rolled through overseas markets overnight, but not focus has turned fully back toward today’s FOMC meeting. US indices have been giving back some of yesterday’s China gains this morning while USD continues to hold steady. Traders may sit on their hands through the morning, reluctant to get caught offside because today’s Fed news has the potential to generate significant market swings for two reasons: 1) There’s still a lot of mixed feelings about what the Fed may do. USD has soared in recent months on anticipation of a more hawkish Fed. Stocks, meanwhile have continued to rally on expectations that the Fed will remain dovish despite an improving economy. Something has to give eventually and today’s decision could be the catalyst. 2) USD has rallied that the USD index is extremely overbought and vulnerable to a correction. The flip side of this is that there are a lot of commodity and currency markets extremely oversold against USD that may be due for a rebound. If the Fed does not go as hawkish as traders have been hoping, USD could come under heavy fire and even if the Fed does become somewhat more hawkish, some traders may be looking to take profits against the news. There are five main things traders may be looking for with today’s Fed news: 1) Guidance: Will the Fed keep its “considerable time” between the end of QE and the first interest rate hike, or replace it with something else. Will the central bank put more of a focus on data like the unemployment rate hitting certain thresholds. 2) Dissent: Last time around there was one hawkish dissenter, Dallas Fed President Fisher. He could potentially be joined by Philadelphia Fed President Plosser and particularly Cleveland Fed President Mester who has called for guidance changes. More dissent could signal a growing hawkish camp, particularly if anyone besides the well-known hawks joins their faction. 3) Member projections: The largest group of FOMC members expects a fed funds rate of 1.00-1.25% by the end of 2015. A move upward could be seen as a sign Fed members are ready to move more aggressively on interest rates 4) Fed Chair Yellen’s press conference She has a reputation for being an ultra-dove but her Jackson Hole conference speech was more balanced. If she moves away from all-out dovishness could impact expectations. 5) Fed Balance Sheet: The Fed has indicated it intends to outline a plan for how to normalize its balance sheet by the end of the year. If it doesn’t happen this time, it would probably happen next time when QE3 wraps up. Like the best agreements which leave both sides unhappy I suspect that the Fed will take the middle route and leave both the hawks and the doves without a victory by going to a less dovish stance but not necessarily going all-out hawkish either. Today’s soft US inflation report combined with the surprisingly soft US nonfarm payrolls from two weeks ago takes some of the pressure of the Fed to act immediately. FOMC members have talked lately about how there are two parts to rate increases, how soon do they start and how fast are the follow on increases once the program gets going. There is enough debate over this to muddy the waters and keep everyone on their toes while giving the Fed room to be flexible. This could create room for significant swings in both directions. The Fed meeting has the potential to impact many markets this afternoon but the most active could be gold, crude oil, JPY, EUR and resource dollars (CAD, AUD, NZD). The news may have less of an impact on the FTSE and GBP which are firmly focused on tomorrow’s Scottish vote which is still neck and neck in the final day of campaigning Corporate News FedEx $2.10 vs street $1.96 Adobe Systems $0.28 vs street $0.26 MicroSoft 10% dividend increase Economic News Economic reports released overnight and this morning include: US consumer prices 1.7% vs street 1.9% and previous 2.0% Australia leading index (0.1%) as expected UK jobless claims (37K) vs street (30K) UK unemployment rate 6.2% vs street 6.3% UK 3M rolling jobs change 74K vs street 120K vs previous 167K UK MPC meeting minutes 2 hawkish dissenters on interest rates, same as last month Eurozone consumer prices 0.4% vs street 0.3% Economic reports due later today include: 10:30 am EDT US crude oil inventories street (1.5 mmbbls) 2:00 pm EDT US FOMC decision $10B taper to $15B expected 2:00 pm EDT US Fed statement and member projections 2:30 pm EDT US Fed Chair Yellen press conference