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What will the FOMC do with interest rates? Will the Fed move to cut the fed funds rate by 25 basis points, 50 basis points, or not cut rates at all?

The stakes are extremely high for this monetary policy meeting. The economy is trying to withstand the credit market turmoil as well as the meltdown in the housing sector. Recent retail sales numbers, employment figures, and consumer confidence numbers all lend credence to the thought that an economic recession is certainly a possibility in the near future.

There are millions of shareholders watching and waiting for this all-important announcement and praying for a large rate cut from the Fed. Shareholders of financial giants such as Bear Stearns (NYSE:BSC) and JP Morgan Chase (NYSE:JPM) will be rooting especially hard for a 50 basis point cut.

Inflationary pressures are still there, with crude oil hitting new highs today and gold prices trading higher than they have in over 15 months. The current FOMC members have made it a point to say that they are extremely concerned with inflationary pressures in the current economic picture, so this fact cannot be discounted.

The fixed-income markets have clearly been begging for a rate cut with the short term treasuries rallying in a huge way in recent weeks. Many prominent bond fund managers, such as Pimco's Bill Gross, have been calling for drastic actions from the Fed to avoid economic doom. The subprime mortgage mess has made the largest lenders cut thousands upon thousands of jobs, while others have filed for bankruptcy.

Chairman Ben Bernanke has made it clear that the FOMC's job is not to rescue the U.S. stock markets from turmoil surrounding the credit crisis. The stock market fell quickly in most of August, but has regained about half of its losses since that time.

Is the subprime mortage mess contained or is it spreading throughout the economy? Is the housing situation going to affect the overall economy? Will inflationary pressures get overheated if interest rates are cut? These are all questions the Fed will be discussing at great length before the announcement tommorrow. 

So, the question is, what will the Federal Reserve do with interest rates? I believe that the most likely scenario is that the Federal Reserve will cut the fed funds rate by 25 basis points. A 50 basis point cut seems possible, but slightly unlikely considering some of the comments out of the FOMC members of late and no cut at all seems highly unlikely given the severity of the decline in recent economic data. I think the most important part of the monetary policy statement tommorrow is the Fed's forward looking statement rather than the news of the specific rate cut amount.

There is a whole lot on the line at tommorrow's FOMC meeting, and investors should be tuned in to see exactly what the Federal Reserve has to say.