Fed’s hands are tied by softer data and dovish market expectations

Which scenario is more likely? Sending a strong message in favour of a December liftoff could unwind the recent easing in financial conditions and the Fed is expected to take that risk. On the other hand, the FOMC may want to send a more reassuring message with respect to the growth outlook than it did in September. 

In effect, the Committee is stuck between a rock and a hard place, risking tighter financial conditions on the one hand or being a source of uncertainty on the other. For this reason, the statement is expected to be somewhat hedged. This could involve a combination of a relatively upbeat economic assessment which focuses on the cumulative labor market improvement and solid domestic demand. At the same time, the statement is expected to retain the key references to international developments. 

"Although we now see the odds tilted in favour of a 2016 move, we acknowledge that a December hike is still a possibility", notes Societe Generale.

 In a perfect world, the data will improve notably over the next 1.5 months and this will push the market to increase the implied probability of a December move. Fed officials could then pile on with 'open-mouth' operations to push those expectations further. Yet, such favourable scenario - even if it materializes - could still be derailed by a debt ceiling standoff of a possible government shutdown.