Tense Markets Await Fed Announcement

Some fear-mongering may be going on as the topic of a 50-basis-point rate hike gets lots of lip service, but without much conviction. The fed funds futures are pricing in 100% odds of another 25-basis-point hike and just 12% odds of an additional 25, according to the CBOT. Understandably then, the U.S. equity and bond markets were sloppy Wednesday ahead of the FOMC meeting's conclusion.

"The market wants to know that the Fed knows that if they go too far, they'll kill people," says Howard Simons, analyst at Bianco Research and contributor to RealMoney.com. Another 25 basis points on the fed funds rate doesn't matter that much, "you just want to know there isn't a monster under the bed," he says. Thursday's expected 25-basis-point rate hike will be the 17th straight in the Fed's two-year old tightening cycle.

Major stock averages struggled through much of the day Wednesday, but ended in the green. The Dow gained 0.45% to 10,973.56, while the S&P 500 tacked on 0.55% to close at 1246. The Nasdaq climbed 0.55% to 2111.84.

Still, the market's tone is negative. Volume is weaker on up days vs. down. For example, 2 billion shares traded on the New York Stock Exchange Wednesday and 1.6 billion in Nasdaq activity, down from 2.2 billion and 1.8 billion shares, respectively, during Tuesday's thrashing.

Notwithstanding the success of J. Crew Group's (JCG Quote) IPO Wednesday, the stock market is reflecting nerves about the consumer, who may stand to lose in both an inflationary or economic slowdown scenario, says Larry Berman, chief technical strategist at CIBC World Markets.

Of the 32 stocks in the S&P 500 that reached fresh 52-week lows in the past week, the bulk of them are tied to the consumer, including Ford Motor (F Quote), Bed Bath & Beyond(BBBY Quote), Tiffany & Co. (TIF Quote) and eBay(EBAY Quote). Bed Bath & Beyond and Ford, whose debt rating was downgraded by Standard & Poor's, hit new 52-week lows Wednesday while Tiffany bounced.

"The consumer is the weak spot," says Berman, adding that the consumer is also facing about $1 trillion of increases in adjustable-rate mortgages amid a slowing housing market.

Before the Fed