The Fed's two-day meeting starts in Washington Tuesday, as President Obama and other world leaders gather in New York.
Traders are watching both, as well as the meeting of G-20 leaders in Pittsburgh later in the week.
"The risks this week will be more political than economic," said Boris Schlossberg of GFT Forex. "The market is expecting too much out of the Fed. I don't think the Fed will be a dollar positive. I don't think the Fed will lift (economic) expectations any more than it has already, and I don't think the Fed will put a hard time table on exiting its easing strategy."
The dollar rose Monday, as stocks and other risk assets moved lower. "We had a little bit of a flutter this morning with worries about G-20," said Schlossberg. "There was rhetoric out of Europe about capping bankers compensation regardless of whether the U.S. supports it or not."
"The markets don't want to see increased regulation of the financial sector just as the economy appears ready to take off so there was a lot of skittishness this morning," he said. Financial regulation and compensation are expected to be topics of discussion.
Stocks drifted Monday, after looking set for a serious sell off at the open. Tech tipped the tape though, pushing Nasdaq to a higher close (up 5 at 2138), while the Dow and S&P 500 were slightly lower. The Dow was off 41 at 9778, and the S&P slipped 3 to 1064. Dell's announcement it was buying Perot Systems for $3.9 billion helped sentiment.
"When it (the Dow) was down 85, everybody thought 'this is going to be it," said Tim Smalls of Execution LLC. "Then all of a sudden, tech reversed." Smalls, like other traders, said he expects to see funds continuing to step in to buy.
"We are a week away from the end of the quarter. You're going to get a big dose of index chasing pretty soon," he said.
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Commodities mostly fell Monday, with oil tumbling 3.2 percent to $69.71 per barrel. "Oil prices declined in sympathy with the rising dollar, which shook off the comment that Iran was going to use the euro for its reserve requirements," said Michael Fitzpatrick, vice president of energy at M.F. Global.
Fitzpatrick said declining crude is a short term phenomena. "I don't think it's going to make a big reversal here. I think it will be higher into the year end."
The dollar Monday gained slightly against the euro, finishing at $1.4674 per euro.
Fed Ahead
The Treasury market ended Monday just slightly higher as investors await the Treasury's auction of $107 in notes this week. On the agenda Tuesday are $43 billion in two-year notes, scheduled to be auctioned at 1 p.m. Traders expect the auction to go smoothly.
The Fed will issue its statement Wednesday. The Fed is not expected to move interest rates but its comments are being watched closely.
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"We are expecting some information from the Fed that first of all suggests their recognition of stronger economic activity," said Zane Brown, head of fixed income strategy at Lord Abbett. He also expects some moderate adjustment of the Fed's comments about the Fed funds target rate. The Fed has said it would keep rates low for an extended period.
"Maybe they drop 'extended period' or modify it somehow to recognize the need for an exit strategy," he said, emphasizing he doesn't expect to see rates change soon.
Brown also said the Fed could indicate it will slow the pace of its purchases of agency debt and mortgage securities. He said it is unlikely the Fed would put a specific date on the program's end but could indicate it will discontinue it sometime in 2010.
Credit Uncrunch
As traders turn their attention to auctions in the government debt market, they've been buzzing about the high level of issuance in the corporate debt market.
"We're likely to continue to see corporate issuance especially in the high yield area. Granted, there is not a lot of lending activity from banks, but companies are happy to lock in what they see as low yields," Brown said. New data this week shows banks continuing to pull back from lending.
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"Demand really exceeds supply when it comes to high yield deals that have been priced over the last few weeks," he said.
"...If we believe as (Fed Chairman) Bernanke said that the recession is over, then we should be narrower than 1000 basis points and should be around 800 basis points, where we are today," said Brown.
Autumn in New York
World leaders descend on New York City this first day of autumn for the U.N. General Assembly. On Tuesday, President Obama meets with President Hu of China. He also speaks at UN Secretary General Ban Ki-Moon's climate change summit and hosts a working lunch with African Heads of State. He will also speak at former President Clinton's annual Clinton Global Initiative summit.
President Obama and Iranian President Mahmoud Ahmadinejad speak at the U.N. Wednesday.
What's Up in Washington
The Senate Finance Committee begins marking up the health care reform bill Tuesday. Vice president Joe Biden weighs in on the health care debate with a speech to the National Association of Insurance Commissioners.
FHFA housing price data is released at 10 a.m.
Corporate News
Intel holds its developers conference in San Francisco, and just a few companies report earnings, including CarMax and Conagra .
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