The expectations from the Federal Open Market Committee to deliver something tomorrow have reached new heights. Markets meanwhile have built expectations and stocks in both North America and Asia rallied on Tuesday July 19^th expecting some sort of action from the Federal Reserve that would help the U.S economy. The June 2012 data for the United States has been especially worrying and has fueled expectations for the Federal Government to act. However, the Greek exit scenario has slightly subsided, and with the FOMC likely to meet again next month, it is unlikely that the Federal Reserve will opt for Quantitative Easing, preferring instead to wait for more signals from the Euro Zone.

There are currently three scenarios that might play out tomorrow. The most unlikely scenario is that the Federal Reserve will do nothing and simply continue with their policy of low interest rates. This news will probably be taken badly by the markets and commodity markets might show a price decrease amidst worries of demand. The second, and most likely scenario, will be the Federal Reserve’s continuation of “Operation Twist” which is set to expire soon. In Operation Twist, the Federal Reserve sells short term securities and buys longer term securities which essentially pull down long term interest rates. This scenario would most likely be welcomed by most markets and would result in the lowest volatility. Stocks and commodities would rally slightly. The last scenario is the Federal Reserve opting for QE which would benefit the markets the most. Expect commodity prices to rise and the US Dollar to fall sharply. 

According to the latest testimony from Ben Bernanke around a week ago, the main concern facing the U.S economy is the effects of the Euro Crisis. As Greeks buy themselves more time, Spanish and Italian banks might be the next problem soon. Given this context, it is likely that the Federal Reserve will save their firepower to shield their economy from another round of Euro tsunami from across the Atlantic.