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Wednesday Look Ahead: Markets on Fed Countdown

Markets are expected to embrace Republican Congressional victories, as they now count down to the Fed's decision Wednesday on its controversial new monetary easing program.

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GOP candidates outflanked Democrats, grabbing a majority of the seats in the House of Representatives. Republicans also made gains in the Senate. Analysts have expected a Republican majority to change the tone in Congress and bring with it a new focus on austerity.

The Fed winds up its two-day meeting Wednesday afternoon with a 2:15 p.m. statement. The Fed is widely expected to announce a plan to purchase an estimated $500 billion in Treasury securities, at a monthly rate of about $100 billion.

Some traders have expected a knee-jerk, sell-the-news reaction in the stock market.

"I'm not really in the camp that the whole thing is priced in, but for two weeks expectations have been pretty much steady. There's also been this almost fashionable idea that we're going to sell off after the elections and the Fed, and I'm not in that camp...more so because of the Fed, because I think people are underestimating the impact of the Fed purchases once they're in the market," said Barry Knapp, head of equities portfolio strategy at Barclay's Capital.

Stocks rose Tuesday, in part on optimism Republicans would make a strong showing in midterm races. The Dow was up 64 to 11,188, and the S&P 500 rose 9 to 1193. The Nasdaq , however, bounded higher, rising 1.1 percent to 2533, its highest close since June 2008. As stocks rose, the dollar lost ground, giving up nearly a percent Tuesday to the euro . Treasury prices rose ahead of the Fed decision, sending 2-year yields to a record low of 0.32 percent. The 10-year note was yielding 2.59 percent.

"We've got to see what the Fed's message is...how much they're putting out here. What's the road map from the Fed? And then how's President Obama going to handle what happened tonight. That will be very important," said Joseph Quinlan, chief market strategist at U.S. Trust, in an interview on CNBC.

President Obama holds a press conference Wednesday at 1 p.m.

The Fed's "quantitative easing" would in theory drive down lending rates, and at the same time boost the economy as it reflates asset prices. QE has its critics both inside and outside of the central bank, but markets have responded just to talk of the new program. Stocks have risen about 13 percent, and the dollar has lost about 10 percent against the euro, since the Fed started discussing it in late August.

"The first thing people are going to look for is a number, and if the number is $200 (billion), $250 or $300 (billion) because it's only a three month period, the reaction is going to be a disappointment in the market," said Stephen Stanley, chief U.S. economist at Pierpont Securities.

"A lot of people are saying they're going to do $500 billion over six months... I think it's more likely they say they'll take it through the beginning of the year, and at the January FOMC meeting, they reassess it at that point," said Stanley.

'Flexible, Open-Ended Approach'

Many economists believe the Fed could continue the purchases beyond six months, since it is not likely there will be a considerable decline in unemployment in that time frame.

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"We expect a flexible open-ended approach from the Fed—one they can scale up and down depending on financial conditions and economic circumstances...they will initiate it with $100 billion a month in purchases for the next three to six months," said Morgan Stanley chief U.S. economist Richard Berner.

There is also some speculation that the Fed could move more lightly on its easing program than the market expects, leaving its options open to expand the program.

CRT chief Treasury strategist David Ader surveyed his firm's clients to see what market participants expected from the Fed. He found the investors were looking for even more than the initial $500 billion economists are expecting—for an average $862 billion in Fed purchases.

The consensus also saw easing continue for the next 10 months. Those surveyed said if the Fed targets $500 billion, rates on the 10-year could go to 2.35 percent. But if the Fed buys $1 trillion, the 10-year yield could slip to 2.10 percent, participants said.

"I think the Fed will talk about somewhere in the neighborhood of $100 billion a month for the next several months and evaluate the data as it comes in," said Ader. "They'll leave it flexible, but they'll leave it large and they'll make no uncertain effort. There will be no ambiguity about what they want to accomplish, which is to keep interest rates down."

In addition to the Fed meeting, there are some important economic reports Wednesday, including the ADP private sector employment report at 8:15 a.m. Economists are watching that jobs data, ahead of the government's employment report Friday. ISM non manufacturing data and factory orders are reported at 10 a.m.

Auto makers are also expected to release monthly sales data throughout the day. "People are talking about a 12 million number, which aside form the cash for clunkers program, would be the best we've seen in a long time," said Stanley. October sales are expected to show auto sales are running at an annualized selling rate of more than 12 million vehicles.

Earnings Central

There are a number of important earnings reports Wednesday, including Time Warner, KKR, Anheuser Busch, Aetna, Devon Energy, El Paso, Molson Coors, WellPoint Health, MGM Resorts, CVS Caremark, and Pulte report Wednesday morning. News Corp and Whole Foods report after the bell.

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