All eyes are now on tomorrow's FOMC rate decision.  Fed fund futures are currently pricing in a 94 percent probability that the Fed will be raising interest rates for the 11th time to 3.75 percent.  Of the 1,300 people who took the DailyFX interest rate poll, 89 percent expect interest rates to be increased again this year, which means that even Katrina won't be able to stop the Fed.  Most of the pre-Katrina economic data has been strong and in the words of Dallas Fed President Fisher who is a voting member of the FOMC, they "don't really know" how Katrina might alter the outlook for the US economy.  Greenspan and company will probably remain in wait and see mode until more Katrina inclusive data is released.  The data that we have received so far that would have included the Katrina impact, have been bad * consumer confidence, manufacturing sector sentiment surveys and jobless claims all worsened.

Unsurprisingly, the main focus should be on the FOMC statement rather than the actual move itself.  The Fed will probably use this opportunity to buy themselves time.  This would not be a first.  Back in March of 2003, right before the beginning of the Iraq war, the Fed said that based upon the current situation, they could not appropriately assess the balance of risks to growth and inflation.

The Fed's job is just as hard this time around since not only do they have to consider the possible economic impact of Katrina, how much of a blow oil prices will deal consumers in the months ahead, but they also have to consider the latest storm brewing off the coast of Florida.  If this becomes another big one, can the economy withstand a double blow by Mother Nature?  At bare minimum, even if Rita delivers little damage, we know that the rebuilding of oil refineries hit by Katrina will be put on hold in anticipation of the next storm.  So even if Japan, Europe and OPEC offer more oil, with some refineries still off line, there is a bottleneck in the production process that could very well keep oil prices elevated throughout the fall.

It may be unavoidable though for the Fed to make some sort of reference to Katrina.  Will Greenspan succumb to political pressure?  Most likely, Greenspan will view Katrina's impact as temporary, just as he has previously viewed the rise in energy prices as temporary.  They may even try to downplay the significance of Katrina and look ahead to the positive growth the rebuilding efforts may bring.  Bernanke has already said that the Hurricane effects are "transitory."  If there is any hint of the same optimism in the statement, the market may interpret it as a sign of a sure fire rate hike in November, which would be bullish for the US dollar. 

On the flip side, if Greenspan shifts his tone and acknowledges the potential uncertainty that Katrina poses to the economy and that energy prices have been elevated for months now, the market could interpret this as a slant towards dovish-ness, which would be bearish for the dollar. 

So bottom-line, the market will be looking for hints as to what the Fed may do in November.

Kathy Lien is the Chief Currency Strategist at FXCM.