Federal Reserve officials will have quite a bit of information to process at their meeting next Tuesday. Economic data are somewhat mixed. The industrial (manufacturing) sector remains mired in recession. Housing activity is relatively healthy these days, but a downturn could be in the cards given that consumer confidence is slipping. Consumers have benefited from lower mortgage rates, but if joblessness ticks higher and income growth moderates, housing activity will surely head south.

Inflation is not a problem these days. This is certainly encouraging for Fed officials because it gives them more flexibility in their policy decision-making.

Fed officials always claim that they don't determine monetary policy on market behavior. However, the Fed tends to an easier policy when stock markets are heading south. The current environment should be friendly for the Fed, as they no longer need to contend with irrational exuberance. Indeed, we've noted the past several weeks how market psychology has shifted towards irrational pessimism instead.

Market players are now looking for either a 50 or 75 basis point cut in the federal funds rate. It seems that 50 basis points is really a done deal. Will the Fed have the guts to do 75 basis points in one fell swoop? That is the question. Sadly enough, market players may have discounted even more than 75 basis points - which means serious disappointment on Tuesday if the Fed only reduces the fed funds rate by 50 basis points.