A look at the day ahead in U.S. and global markets from Mike Dolan

There's little left to say about the dominant event of the day - other than how to game markets' reaction to the size of the Federal Reserve's interest rate cut later and what Fed policymakers project over the horizon.

Few, if any, doubt the first Fed easing of the cycle is now at hand. Wall Street's S&P500 hit a new intra-day record on Tuesday ahead of the decision - lapping up the prospect of lower borrowing costs even as the economy picks up some steam. Stock futures held firm overnight into the big decision.

What's not to like?

A last-minute economic health-check as Fed officials gathered showed retail sales unexpectedly rising again in August and factory output beating forecasts, confounding more downbeat surveys of manufacturers last month.

So much so, the Atlanta Fed's 'GDPNow' model raised its third-quarter growth estimate by half a point to 3% afterwards - on par with the pace the economy grew in the second quarter.

And despite the effervescence in markets and buoyancy of the economy, futures are still leaning toward a 50 basis point Fed cut on Wednesday rather than a more regular 25bp move. With 40bp still priced, that puts the chances of a bigger move at 60%.

Former Fed economist Claudia Sahm was on Tuesday the latest Fed alumnus to call for the heftier 50bp cut this week - arguing now was the time to act to prevent unnecessary job losses and ensure the central bank's twin goals were met.

"This is a Fed that has been very much behind the maximum-employment side of the dual mandate," Sahm said.

So, on the face of it, the economy in humming with a big rate cut coming and inflation is back in its box. Those poring over market almanacs see only good things from that.

It may be different this time, of course, but the average one-year stock market return after the first Fed rate cut is almost 5% even when a recession occurs. And it's more than 16% when the cuts come without a recession materialising at all - the most likely scenario now facing investors.

On the other hand, would the stock and bond markets now sulk if they don't get the 50bp cut favoured in the futures market?

For that, we may need to see how the cut matches up with Fed policymakers' 'dot plot' of future rate projections. Markets may quickly brush off a move if it simply pushes the total amount of easing out to coming meetings and expresses confidence about the economy.

Some think signs of dissent in the 'dot plot' may be important - not least if it suggests the Fed eased less than some of its policymakers thought it should.

And of course there will be attention on the so-called long term dot, which was put most recently at 2.8%. As this is broadly seen as Fed officials' estimate of the sustainable 'neutral' rate that neither spurs nor slows the economy, it's important in calculating Fed thinking on the extent of the cycle.

Before we get there, the Treasury market has sobered up a bit - with the two-year yield edging back above 3.60% - more than 10bps above two-year lows hit on Monday. That's been just about enough to hold the dollar index off the year's low for now and above 141 Japanese yen.

The yen was reined in further by disappointing Japanese trade data that saw both exports and imports miss forecasts.

Stocks around the world generally mixed to positive, in line with Wall Street futures.

Underperforming in Europe, UK stocks lost some ground and the pound pushed above $1.32 as the Bank of England is not expected to follow the Fed on Thursday - likely leaving its second cut of the year until after the new Labour government's first budget next month.

Reinforcing that thinking, British inflation held steady in August but sped up in the services sector which is closely watched by the BoE. Even though headline inflation remained steady near target at 2.2%, services inflation climbed above forecast to 5.6%.

But as much attention on Thursday may be on the BoE's latest annual estimate for the rundown of its balance sheet of bonds - widely expected to be a targeted 100 billion pound reduction over the next 12 months, as it was last year. A potential boom for the bond market, however, is that repeating that target would mean a 75% reduction in active gilt sales due to a large schedule of maturing debt that would runoff automatically.

Canada on Tuesday had much better news on the inflation front, with its CPI rate hitting the central bank's 2% target in August - below forecast and fuelling hopes for a 50bp rate cut from the Bank of Canada next month.

Key developments that should provide more direction to U.S. markets later on Wednesday:

* Federal Reserve's Federal Open Market Committee announces policy decision, with quarterly economic projections and press conference by Fed chair Jerome Powell

* US August housing starts/permits, July TIC data on overseas Treasury holdings

* Brazil central bank policy decision

* International Monetary Fund First Deputy Managing Director Gita Gopinath speaks in Ireland

* US corp earnings: General Mills

(By Mike Dolan, editing by Andrew Cawthorne; [email protected])