This column was originally published on RealMoney on Sept. 19 at 1:35 p.m. EDT. It's being republished as a bonus for readers.

After 10 largely predictable and well-telegraphed interest rate hikes, investors are expecting the

Federal Reserve

to deliver yet another hike on Tuesday, but there are very large uncertainties about the construct and guidance that will be given in the Fed's policy statement.

Moreover, in the aftermath of the University of Michigan's consumer sentiment survey for early September last week, which showed the largest-ever reported decrease, and amid enormous uncertainties around the full impact of Hurricane Katrina, and new uncertainties with respect to Tropical Storm Rita, there are at least some reasons for the Fed to consider a pause.

But that is a scenario being assigned almost no probability in the market for federal funds futures. A surge in inflation expectations and the still-accommodative level of the federal funds rate are seen as overriding factors that will likely keep the Fed on the rate-hike path.

The federal funds futures market is currently priced for 96% odds of an interest rate hike at Tuesday's meeting. The odds of such had been around 100% until Katrina, when the odds of a hike began a fall that reached as low as 50% on Sept. 2. Since then, however, the odds of a hike have returned to pre-Katrina levels in response to signs of resilience in the U.S. economy and an increase in inflation expectations.

As for future hikes, fed funds futures are priced for 64% odds that the Fed will deliver another interest rate hike when it meets on Nov. 1, putting the fed funds rate at 4%. The market is priced for the funds rate to go no higher than 4.25% in 2006.

Several Scenarios

If the Fed raises interest rates, the market response will depend mostly upon whether it reiterates that monetary policy is "accommodative." This is the Fed's code word for indicating that more interest rate hikes are on the way. If "accommodative" remains in the text, then no change in Fed policy will have been announced, hence rendering it a neutral factor.

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If the Fed hikes rates and removes "accommodative," this could generate a positive response in the equity market. Investors would be cheering the Fed's vigilance on inflation. That would not be diminished much by the notion of an upcoming pause, primarily because the Fed would not yet have committed itself to ending its hikes before the all-clear on inflation had been sounded. In essence, the Fed would be saying, "We are close to a pause and will do so when inflation pressures appear to have subsided, and we feel that moment is around the corner."

Some might disagree with this view, believing that any hint at a pause would raise inflation concerns, but I believe that if the language shows continued commitment toward fighting inflation while indicating that neutral is nearby, investors would feel comforted on the inflation front and relieved that the fed funds rate is close to its likely peak.

If there is no hike, that would spur a wrongheaded knee-jerk response that would not likely last long (minutes to hours). After some brief cheer, the following effects are likely: higher commodity prices, higher long-term interest rates and a steeper yield curve, gains in the value of inflation-indexed Treasuries relative to conventional Treasuries, weaker stock prices in response to rising long-term interest rates, and rising inflation expectations.

Still 'Measured'?

The consensus expects the Fed to continue to say that monetary policy remains accommodative and to once again indicate that the accommodation "can be removed at a pace that is likely to be measured." Removing "measured" won't mean much if "accommodative" is still in the statement, because "measured" merely relates to the speed at which the Fed is expected to remove the accommodation.

If "measured" is removed, its meaning depends upon both the presence of the word "accommodative" and the degree to which the Fed asserts its determination to fend off inflation pressures. The tougher the Fed sounds, the more likely it is that any removal of "measured" would be seen as a signal of the potential for more aggressive hikes in the months ahead (either 50-basis-point hikes or a higher endgame for the funds rate).

On the other hand, if "measured" is removed and the Fed seems more worried about the economy than about inflation, the removal would be seen as a sign that the Fed is getting closer to pausing. Still, even in this scenario, the presence of "accommodative" would be seen as the more important signal of whether the Fed is closer to the endgame on rates.

As for the balance of risks with respect to the attainment of both sustainable growth and price stability, the Fed is expected to say that the balance of risks for growth remained equal but that the risks on inflation had moved toward higher inflation. A forecast on how the Fed expects the effects of Katrina to play out is likely to be included in the statement.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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