Market Anticipation: Fed's Rate Decision Moves Stock Indexes, Dollar

Traders are closely watching the Federal Reserve's anticipated rate cut decision, with uncertainty looming over whether it will be a quarter-point or a half-point cut. Market reactions are expected to be significant, with previous retail sales data influencing dollar and bond yield movements.

Wall Street's main stock indexes were broadly flat in early trade on Wednesday, and the dollar weakened as traders weighed the odds that the Federal Reserve's expected decision to cut interest rates for the first time in more than four years would deliver a supersized move. Financial markets fully priced in a quarter-percentage point rate cut, while the odds of a more unusual half-point cut stood at 63% by Wednesday, according to LSEG data, up from as little as 14% a week ago.

'Given the uncertainty that's still looming, we can expect a decent market reaction whatever the decision is,' a Deutsche Bank analyst said in a note. 'You'd have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today,' they added.

The Dow Jones Industrial Average fell 0.16%, to 41,537.83, the S&P 500 0.03%, to 5,633.04, and the Nasdaq Composite ticked up 0.07%, to 17,638.87. MSCI's index of world stocks fell 0.10%, to 827.88 after touching a two-week high a day earlier.

The U.S. currency edged lower, handing back some of the gains made on Tuesday when unexpectedly robust U.S. retail sales data was interpreted as weakening the case for aggressive Fed easing. The dollar index, which measures the greenback against a basket of currencies, fell 0.13% to 100.78.

AFTER THE FED: Chances of the Fed kicking off its easing cycle with a super-sized cut of 50 basis points (bps) were revived in recent days by media reports suggesting more aggressive action.

The announcement is slated for 2 p.m. ET. A 25 bps cut would indicate central bankers think inflation is cooling and economic growth is slowing but not headed for a sharp downturn. A larger cut could be a sign of deeper concerns about the economy's health.

Strategists are looking for signs of future plans. 'We love this debate - everyone's very focused on 50 or 25 but what is important is that they communicate to the market that they intend to go neutral by next summer,' said Samy Chaar, chief economist at Lombard Odier in Geneva.

'The worst you can get is they go 25 and pretend everything is normal and that monetary policy still needs to be restrictive.'

U.S. bond yields ticked higher. The 2-year Treasury yield, the most sensitive to short-term rate expectations, edged up to 3.6444%. The benchmark 10-year yield rose to 3.685%.

Both the Bank of Japan and the Bank of England are due to meet this week.

Against the Japanese yen, the dollar weakened 0.48% to 141.71. The euro gained 0.14% to $1.1129. Sterling strengthened 0.54% to $1.3231 after data showed British inflation held steady in August but picked up in the services sector, adding to bets that the Bank of England will keep interest rates on hold on Thursday.

Gold rose 0.07% to $2,571.45 an ounce. U.S. crude futures declined 0.24% to $71.07 a barrel, while Brent fell to $73.52 per barrel, down 0.3% on the day.