The market is widely expecting the central bank to reduce its benchmark rate from 4.75% to 4.50%.
But the Fed, which meets Tuesday and Wednesday, is in something of a bind. The credit markets remain squeezed, but energy and food costs are soaring and the dollar is tumbling. The balance between controlled inflation and fluid markets is one the central bank is always trying to preserve, but it's been a while since the tightrope has looked this precarious.
Most investors expect that the Fed will decide tight credit is the bigger risk to the economy and will lower rates -- a good bet, given how many times U.S. policymakers have said they would help maintain liquidity in the financial markets.
The question, though, is how long the Fed will maintain that stance. Crude oil prices have soared about 50% year to date, and the dollar has sunk more than 8% versus the euro this year to record lows.
The market is pricing in not only a quarter-point rate cut after the central bank's Tuesday-Wednesday meeting but also another one at its Dec. 11 meeting. If the statement that accompanies this week's decision indicates the Fed is loath to make borrowing even cheaper because of inflationary risks, stocks could be in for a bumpy ride.
A rumor Wednesday of an emergency Fed decision before its scheduled meeting fueled a rebound in stocks from steep early losses that day. The move exemplified how jittery the stock market has been since blue-chip indexes hit record highs Oct. 9.
Wall Street remains worried about how much more the housing market will deteriorate and whether it will drag down the rest of the economy.
Investors also are fretting about the willingness of banks and other financial firms to keep lending after their credit-related losses in the third quarter.
Uncertainty breeds volatility, and the Dow Jones industrial average saw several triple-digit swings last week. The Dow ended the week up 2.1%; the Standard & Poor's 500 index advanced 2.3% and the Nasdaq composite index rose 2.9%.
Besides the Fed decision, investors this week will also have a heavy dose of economic data to digest. The reports are expected, on the whole, to suggest slow growth and tame inflation.
The Commerce Department on Wednesday will release its first reading on third-quarter gross domestic product. The Institute for Supply Management on Thursday will report on October manufacturing, while the Labor Department will report on September personal income, spending and inflation.
And on Friday, the Labor Department will release its report on October employment. For the stock market, the monthly jobs numbers have become the most closely watched economic data, because the bullish case on the economy and corporate earnings hinges largely on whether consumers keep spending.
If employment growth slows or turns negative, more consumers are likely to scale back spending and more may miss home loan and bill payments.
Economists surveyed by Thomson Financial expect, on average, payrolls to have risen by a net 85,000 in October, down from September's rise of 110,000. They anticipate the unemployment rate to hold steady at 4.7%.
And although the majority of U.S. companies have released their third-quarter results, there are still some big names on deck. Companies releasing quarterly results this week include Kellogg Co., RadioShack Corp., Colgate-Palmolive Co., Procter & Gamble Co., Eastman Kodak Co. and Exxon Mobil Corp.
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At a glance
Treasury bill auction.
Quarterly earnings reports due from Kellogg, Northwest Airlines and Verizon Communications.
Federal Reserve Open Market Committee meets to discuss interest rates, through Wednesday.
House Oversight and Government Reform subcommittee hearing on higher postal rates.
House Judiciary subcommittee hearing on homeownership protection and consumer relief.
Conference Board reports its monthly consumer confidence index.
Quarterly earnings reports due from DreamWorks Animation SKG, McKesson, Colgate-Palmolive, MGM Mirage, Procter & Gamble and United States Steel.
Fed expected to announce decision on interest rates.
Labor contract set to expire between Hollywood studios and the Writers Guild of America.
Commerce Department reports on gross domestic product for third quarter.
Commerce Department reports on construction spending for September.
Labor Department reports on employment cost index for the third quarter.
Quarterly earnings reports due from Kraft Foods, MetLife, Newmont Mining and Weyerhaeuser.
Automakers release their sales figures for October.
The Institute for Supply Management issues its report on activity in the manufacturing economy for October.
Commerce Department reports on personal income and spending for September.
Labor Department reports on weekly jobless claims.
House Energy and Commerce subcommittee hearing on the Food and Drug Administration's foreign drug inspection program.
Quarterly earnings reports due from Electronic Arts, Napster, PG&E, CBS, Eastman Kodak and Sprint Nextel.
Commerce Department reports on factory orders for September.
Labor Department reports on employment for October.
Civil rights leaders have called for a National Blackout, a protest encouraging African Americans to show their economic power by refusing to spend money on this day.
Quarterly earnings reports due from Chevron, Duke Energy, International Paper and Viacom.
Source: Times staff and wire reports