Will Fed provide stay-the-course message?

Fed statement comes tomorrowFederal Reserve policymakers opened two days of meetings today on the economy, and the financial markets are waiting to hear the central bank's latest pronouncements.

While no change in interest rates is expected, the real news will likely come from the Fed's statement on the economy. The statement will be released early Wednesday afternoon.

Many analysts expect the Fed to say it continues to remain vigilant and will adjust interest rates if necessary as economic conditions change.

"The surprise would be if there was a surprise," Bill Schultz, chief investment officer at McQueen Ball & Associates told the New York Times this morning.

Joel Naroff, chief economist at TD Bank, issued his assessment following this morning's release of second quarter productivity data. Productivity surged in the quarter by 6.4 percent.

"Businesses have become lean and mean and that is translating into lower costs and the ability to grow as the economy turns around," Naroff wrote in his e-mail newsletter.

As for market and Fed policy implications, Naroff wrote: "This is a very positive (productivity) report as it indicates firms have tken the steps to control labor costs. That has put many businesses in position to see earnings pick up as the economy rebounds. Early in the recovery, firms are quite cautious in their hiring. Thus rising sales should flow fairly quickly to the bottom line. Since it is earnings that investors will be looking for, this should buoy future prospects for the markets. The Fed has started a two-day meeting. While no change in rates is expected, what the Fed says in its statement about the economy will provide some hints as to when
they might start raising rates, at least that is the hope. With the Fed, you never know.

Finally, these comments from employment analyst John Challenger: The Bureau of Labor Statistics’ (BLS) latest reading on the nation’s productivity showed that hourly output per worker increased 6.4 percent in the second quarter, the biggest gain in six years. While this is good news for those worried about inflation, it is not very good news for the growing ranks of unemployed hoping to find a job quickly. With productivity on the rise amid shrinking payrolls, it tells employers that they can continue to produce the same or more output. So, they conclude, what is the rush to add workers when the recovery begins. They will continue to postpone hiring until productivity drops to a level that makes it difficult to fulfill orders. Even then they might first try to increase output through technology instead of increased manpower."