Stock market waiting for Fed message

Freeze, hike or cut. Investors aren't losing sleep over any of the moves the Federal Reserve might make when the central bank's policymakers meet Wednesday.

Equity strategists say the stock markets have already priced in the eventuality that the Fed will keep interest rates steady after raising them 17 straight times over a two-year period. Following the Fed's pause in August, Wall Street has grown more confident that Chairman Ben Bernanke and his colleagues will make no radical moves for the balance of the year.

Instead, investors will be intently watching what Bernanke is thinking about the economy long-term. The most market-moving outcome of the meeting will likely be a Fed statement saying it is satisfied with the economy moderating as expected, and that signs of accelerating inflation are minimal.

"There's this obsession with the future," said Anthony Chan, chief economist at JPMorgan Private Client Services. "Investors are looking for signals around the message, rather than the decision itself."

He added that "nobody is holding their breath about the decision, but what kind of story they're going to tell to describe further action." Chan, like many of his economist colleagues on Wall Street, are betting on another Fed pause.

Wall Street will focus most of its attention on the bias that comes along with the Fed's decision; that's the Fed's assessment of where it stands on interest rates - whether it's likely to raise or lower them or keep them stable.

Of particular interest is if central bankers feel, given recent economic data, that a soft landing of the economy - the Fed's goal as it raised rates - is on the way.

Any commentary from the Fed that the economy seems to be following the so-called "Goldilocks scenario" - not too hot, not too cold - will be best for stocks. This kind of attitude released with the Fed decision could cause a major Wall Street advance, said Charles H. Blood Jr., senior financial markets analyst at Brown Brothers Harriman & Co.

"At this point in time, the Fed has a pretty big bet on its forward forecast that the economy will slow, and inflation will ease," he said. "The markets won't move on what they do, but the nuance of the language will have a big effect. Everyone will be trying to read the conviction level on the forecast."

He'll be looking to see if there's any debate among Fed officials that they're keeping the door open for future rate hikes, which will likely spook the markets. Blood said "the less debate the better it is for stocks."

Traditionally, the Federal Reserve tends to begin easing rates within six to eight months after it ends a tightening cycle. A rate hike, on the other hand, continues to look more out of the question - especially given recent economic data.

Last week, the Mortgage Bankers Association reported that more homeowners with shaky credit are falling behind on payments - especially for those with subprime loans who pay exorbitant interest rates. Those with adjustable-rate loans that reset to higher rates are experiencing more delinquencies, which is expected to rise next year.

The Fed's campaign of rate hikes really haven't done much damage to fixed-rate loans, where homeowners have been locked into some of the lowest interest rates in decades. In fact, the association reported those loans have seen delinquency rates dramatically slide during the past few years.

Moves by Bernanke to resume raising rates could cause many homeowners already saddled by delinquencies into bankruptcy. The Fed chief is expected to be very cautious this time around about picking the right direction and sticking to it, Blood said.

"Both within the Fed and the Wall Street community is a real sense of debate about where exactly we are in the economic cycle," he said. "It would be hard for them to say they're not entirely done because they really don't have anything to point to. There's just no data out there that suggests more increases."