"Consensus has the Fed easing 25 basis points, and the world will be looking at the statement," said Elliot Spar, Option Market Strategist at Stifel Nicolaus & Co.
"The market wants to hear that the risks are to the downside for the economy which implies more rate-cutting ahead," said Spar.
With less than an hour to go before the Fed releases its verdict, the Dow Jones Industrial Average was up 6.2 points at 13,733.2.
Of the blue-chip index's 30 components, 16 were trading higher, led by AT&T , which advanced 6.4% after the telecommunications giant said it is increasing its dividend by 13% and buying back 400 million shares. .
Dow laggards included its financial shares, with American Express Co. recently off 1.4% and JP Morgan Chase Co. down 0.4%.
The S&P 500 fell 2.88 points to 1,518.84, while the Nasdaq Composite climbed 11.12 points to 2,730.07.
On the New York Mercantile Exchange, crude-oil futures rose $2.18 to $90.04 a barrel. . Elsewhere on the Nymex, gold futures gained $3.2 to $816.7 an ounce. .
On the New York Stock Exchange, 601 million shares traded hands while on the Nasdaq, 938 million shares were exchanged. On the NYSE, declining stocks outpaced those advancing 8 to 7, while advancing stocks edged slightly ahead of decliners on the Nasdaq.
Economists are looking for a rate cut of at least a quarter of a percentage point, if not half a point, when the Fed announces its decision at 2:15 p.m. Eastern time. .
"While market consensus predicts a 25 basis point cut in the fed funds target rate, we feel there is a reasonable probability of a half-point cut. We would argue that the current target rate [4.5%] is rather neutral, and the Fed wants to get the ball rolling and insure that the U.S. economic does not fall into recession," said Stuart Freeman and Scott Wren, equity strategists at A.G. Edwards & Sons Inc.
The Fed will cut rates Tuesday afternoon, with the only question being how much, said Gene Peroni, senior vice president at Advisors Asset management. .
Issues in action
Texas Instruments shares jumped 2.9% after the company lifted its forecast, citing strength in demand for power notebook chips offseting weakness in wireless.
Shares of H&R Block Inc. fell 0.1% after the nation's largest tax preparer forecast a wider second-quarter loss as it winds down its troubled subprime-mortgage operations.
Washington Mutual shares fell 7% after the lender said it would exit the subprime lending business and cut 3,150 jobs. It also plans to slash its dividend and sell $2.5 billion in convertible preferred stocks.
Kroger Co. shares slid 4.8% after the largest U.S. supermarket operator reported an 18% hike in third-quarter profit, topping Wall Street estimates, but offered a forecast that fell below consensus projections. .
Shares of Starbucks Corp. also fell, down 2.3% in early afternoon trade, after Goldman Sachs cut its rating to neutral from buy, citing slower same-store sales and declining new store productivity. .
European shares edged lower, paced by a decline in the property sector as investors fretted about tightening credit market conditions, even amid expectations of an imminent rate cut. .
Asian stocks rose, with markets in Hong Kong and Japan tilting higher as investors bought financials, also on speculation the Fed would cut rates again. .
By Kate Gibson