Updated from Aug. 12

Market expectations for a Federal Reserve interest rate cut remained low in the hour before the decision was due. Wall Street was quiet despite a new government report that showed the economy lurching forward and an economic pep talk from President Bush.

Stocks were all but unchanged an hour before the rate decision was to be announced as Wall Street waited for the Federal Open Market Committee to weigh in not so much on rates themselves, but on its opinion of the nation's economic prospects.

Fed fund futures, considered a good proxy of monetary policy, were pricing in only a 25% chance of an easing this morning. The futures had been placing 50% odds on a rate cut at the end of last week. Most private sector economists now think it is unlikely that the Fed will lower interest rates.

Meanwhile, the Commerce Department said retail sales rose 1.2% in July, in line with expectations after an upwardly revised 1.4% increase in August. Most of the gain was the result of cars being sold via interest-free loans and economist said the report did little to change existing perceptions of a struggling recovery.

Incredibly Optimistic

At an economic forum at Baylor University in Texas, Bush said he's optimistic about the country's prospects. "We're pleased with some progress, but we got more to do," Bush said. "Even though times are kind of tough right now, we're America -- I'm incredibly optimistic about the future of this country because I understand the strength of this country. ... We got a lot going for us."

Economists are divided, however, in their opinions of what the Central Bank will say about the economy in its statement. Depending on that, the market could have very different reactions. According to Tom Schrader, a trader at Legg Mason, the market is expecting the Fed to adopt an easing bias.

"If they take an easing bias, you could get a rally," said Schrader. "If not, you will get a selloff."

Currently, the Fed's stance is neutral, meaning it thinks risks of a weak economy are equal to risks of inflation. If it were to move to an easing bias, it would be indicating concern about an economic recovery.

Balanced Risk

Schrader, as well as other economists, do not think the Fed is going to alter its bias. "I expect no change in rates and a continuation of a balanced risk assessment," said Mary Dennis, an economist at Merrill Lynch. "The Fed is concerned about credit conditions and the equity market. But it would be alarming if it was to change its forecast so drastically that it was willing to cut rates."

Last week, the market rallied when a government report showed inflation in check. One of the Fed's primary dealers -- Morgan Stanley -- called for lower rates on Tuesday. "We believe the Fed will ease monetary policy at its meeting Tuesday by 50 basis points to insure that emerging economic weakness doesn't turn into a double-dip recession," said Richard Berner, of Morgan Stanley, in a note last Friday.

Several other economists said last week they expect the Federal Reserve to reduce interest rates -- now at 1.75%, their lowest level in more than 40 years -- this year. Fed fund futures are pricing in 100% likelihood of a 25 basis point cut by the end of the year.

In the past few weeks, weakness in durable goods orders, purchasing managers surveys, consumer confidence, and employment data have sparked fears the economy could go back into recession. Credit conditions remain tight, with reports saying commercial paper markets are closed to many companies.

Still, economic data have been mixed. Last Thursday, weekly initial jobless claims fell to their lowest level since March. And some say that economic damage -- the recent drop in consumer confidence, in particular -- may be the result of recent corporate scandals and thus somewhat temporary.

"We do not have a recipe for contraction," said Steven Wieting, an economist at Salomon Smith Barney. "We have a recipe for slow growing. Hopefully, the Fed can point to stable consumer demand."

Wieting does not expect the Fed to cut interest rates on Tuesday. But he thinks that members will probably argue that the risks of weak demand outweigh the risks of inflation.

"The best case is for the Fed to wait for more data, and then ease if they warrant it," said Wieting.

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