Fed officials, who will announce their decision around 2:15 p.m., have offered few clues on their likely course of action. Yet, despite the strong GDP report, financial markets are betting that policymakers will cut overnight interest rates by a quarter-percentage point, to 4.5%.
"Certainly the GDP number was much stronger than anticipated and that may lead to some second-guessing about what the Fed may do this afternoon, coming on top of that ADP
number which was also much stronger," said Scott Brown, chief economist with Raymond James in St. Petersburg, Florida.
A cut in rates today would follow last month's surprisingly large half-point reduction -- a move Fed officials had hoped would put them out in front of any potential economic weakness.
"In an economic expansion that had already slowed, leading sectors continue to display surprising softness and further cautious policy action can help to contain a widening out of the damage," Citigroup economist Robert DiClemente wrote in a recent analysis.
But that view is not universally held. Some analysts think the Fed may determine housing woes are not crimping consumer or business spending and may decide the best course is to hold rates steady out of concern a misstep might ignite inflation.
Gloomy Economic Data
Before today's GDP report, a parade of gloomy economic data had suggested the economy will be weaker in coming quarters than anticipated by the Fed.
On Tuesday, data showed U.S. consumer confidence slipped for a third straight month in October, while home prices posted their biggest drop in 16 years during August.
But one school of thought holds that markets have overestimated the Fed's appetite for another rate reduction and that the economy, while growing modestly now, is already poised for a pick-up next year.