The Federal Open Market Committee is set to meet tomorrow to discuss the state of the US economy and ways to push recovery.  The Financial Times is now reporting that the Fed will "downgrade its assessment" of the economy.  So that opens up questions of what tools the Fed may use to stimulate the sluggish recovery.  Will the Fed be able to inject additional fiscal stimulus measures?  Is additional quantitative easing a possibility?  The University of Oregon's Tim Duy is expecting a "small change."

Bottom Line:  The incoming data appears largely consistent with the Fed's priors - especially expectations of glacially slow improvement in the labor market.  Yet the probability of any upside risk to the forecast have diminished markedly.  The V-shaped recovery has not emerged.  The elimination of that upside risk argues for additional easing, but the Fed appears hesitant to do more.  Uncertainty about the effectiveness of additional easing argues against more action, especially given relatively quiescent financial markets and positive, albeit lackluster, growth.  Moreover, any additional action now is essentially a promise to do more later, even if growth remains along its current trajectory.   All of these points argue against additional easing tomorrow, and that remains my baseline scenario.  The case becomes muddied by internal, staff level pressure to do more now, combined with rising expectations of imminent easing given the steady flow of leaks to the press.   This opens the possibility of a small policy adjustment that eliminates that passive reduction of the balance sheet. Any more is off the table.  

Read Tim Duy's Fed Watch here.