Tuesday Lookahead: Fed Could Soothe Markets After Japan Selloff

As the world focuses on the nuclear energy crisis in Japan, the fed Tuesday is expected to show it remains committed to its easy money policies to help the U.S. economy restore jobs and stay on course at a time of calamity for global markets.

The Fed ends its meeting with a statement at about 2:15 p.m. ET and is expected to repeat its endorsement of its low (zero) interest rate policy and its asset purchase program, or quantitative easing (QE2). Traders are also watching to see what the Fed says about the economy or inflation.

"All they can do is don their pom poms again and cheer lead the market higher. They've done everything else," said Jack Ablin, CIO of Harris Private Bank.

Besides the Fed meeting, several economic reports are due Tuesday, including import prices and the Empire State Survey, both at 8:30 a.m. The Treasury issues its international capital flow data at 9 a.m. and the National Association of Home Builders Survey is reported at 10 a.m.

Japanese stocks Tuesday plunged after PM Naoto Kan warned about the risks of leaking radiation after a third explosion at the Fukushima Daiichi complex. In the U.S., the Dow fell 51 to 11,993 and the S&P 500 was off 7 at 1296, but not before falling sharply in earlier trading.

Ablin said he still sees better value in stocks now and expects the S&P to reach 1350 this year, just above the high of 1343 it reached in February. "I still feel okay," he said. "The good news is valuations provide a good cushion. We're not table pounding cheap. It would be very difficult to argue it's an expensive market now."

Markets Monday focused on the devastation in Japan and the continuing concern that stricken nuclear reactors could be melting down. Traders were also watching Bahrain, where Saudi Arabian and other troops arrived to help safeguard facilities there as protests continue, and Libya, where Muammar Gaddafi has reclaimed territory.

Stocks and ETFs with connections to nuclear energy sold off as the situation in Japan remained uncertain. General Electric , former parent and minority holder in CNBC, fell 2 percent. GE had supplied a containment system and boiling water reactor at the troubled Fukushima Daiichi Power Plant 40 years ago.

"The market has a way of hurdling bad news, and then it will focus on something else," said Cowen and Co head trader John O'Donoghue.

Oil started Monday sharply lower, but it recovered losses on headlines from the Middle East. Oil was also weaker on the expectation that Japan will import less crude because its refineries were severely hit by the earth quake and tsunami. Natural gas, on the other hand, rose as traders expected Japan to fill the void with liquefied natural gas. As oil moved higher during the day, it pressured stocks.

"Oil and interest rates are the life blood that flows through the economy's circuits. If crude gets more expensive you try to offset it with lower interest rates, but now you can't," said Ablin, referring to the Fed's low rate policy.

Fed Ahead

Treasurys were the beneficiaries of market fear Monday, as investors drove prices higher. As a result, the yield on the 10-year fell to 3.36 percent. The Treasury market is watching the Fed's meeting, as chatter there often focuses on what will happen when the Fed ends its $600 billion program to buy Treasury securities in June.

The stock market is also focused on the wind down. "The market is worried about the power plug being pulled by the Fed," said O'Donoghue.

J.P. Morgan economist Michael Feroli, in a note, said he doesn't expect any change in the Fed statement on the QE program, but it may tweak the language to give a nod to improving jobs data. He noted it may say that it doesn't see a recovery that's strong enough to generate a "period of sustained strong job creation." It last stated that the recovery is "insufficient to bring about an improvement in labor market conditions."

Feroli also said it is unlikely the Fed will address energy prices, but higher oil prices may get a mention when the Fed mentions inflation.

What Else to Watch

Nasdaq may come out swinging with a possible bid for NYSE Euronext, which has promised to merge with Deutsche Bourse. CNBC's David Faber reports that Nasdaq had nearly secured financing for a hostile bid that could involve the Intercontinental Exchange.

KKR holds an investor day for the first time ever, starting at 8 a.m.

Marc Faber, publisher of the Doom and Gloom report, and Mark Mobius, who heads Templeton Asset Management, will appear on CNBC's "Squawk Box."

Questions? Comments? Email us at marketinsider@cnbc.com