“The Federal Reserve speaks Wednesday, and the bond market anxiously awaits the latest word on interest rates and the economy,” writes Aaron Lucchetti in today’s Wall Street Journal.

“Wall Street widely believes the Fed will cut short-term interest rates, but late Tuesday traders continued to bicker over how far the Fed will move, with the market split between favoring a quarter-point cut, as opposed to a more aggressive half-point move. Along with the rate move, investors and traders are keenly anticipating what the Fed will say about the economy, the prospects for deflation and any future rate moves.”

“The Fed’s Federal Open Market Committee concludes a two-day meeting Wednesday, with any interest-rate news and an accompanying statement expected at about 2:15 p.m. EDT. The federal-funds rate, or the rate the Fed charges for overnight bank loans, stands at 1.25%, its lowest level in 42 years.”

” ‘This is certainly a Fed meeting in which the market has an intense interest,’ says Peter Hooper, Deutsche Bank’s chief U.S. economist and a former Fed official. Mr. Hooper says he expects the Fed to pursue the more incremental approach of a quarter-point cut with a statement similar to the one released after its most-recent meeting May 6. At that time, the Fed left rates unchanged but warned that the risks of falling prices were greater than the risks of rising prices.”

“Since that pivotal May announcement, the stock market has rallied, bond yields have moved still lower and some economic barometers such as industrial production and retail sales have showed signs of life. The Fed, seeing this, will likely pursue the same course, says Mr. Hooper. ‘Don’t mess with success,’ he says.”

“That view is hardly a consensus on the Street. In a Dow Jones/CNBC survey of the 22 primary dealers in U.S. Treasurys Tuesday, 12 predicted a half-point cut, and 10 predicted a quarter-point cut. That consensus is little changed from last week, despite major news articles in the Washington Post (read by traders as favoring a half-point move) and The Wall Street Journal (read by traders as favoring a quarter-point move).”

“Because of the uncertainty about the magnitude of the Fed move, expectations for short-term rates will likely snap one way or the other based on the size of the expected move. In some less-eventful Fed meetings of the past, the market had effectively priced in expectations and little movement occurred after an anticlimactic announcement.”