Fed prediction

The futures are giving 2:1 odds of 25:50 bps, with essentially zero chance of anything else.

I think the Fed would like to “get ahead” of this thing, since a pattern of 25 bps cuts just encourages people to wait for even lower rates, which partially defeats the purpose. That argues for 50 bps (or more). But last week’s job report was just too strong, so I do not think they will do it. I am sticking with the market’s prediction of 25 bps.

But the story does not end there. The WSJ blog covered certain unusual activity by the NY Fed in recent weeks. (They are the only source I follow that has mentioned this very interesting story.) Pulling $10 billion out of the monetary base heading into shopping season is strange; the Fed is definitely up to something. So in addition to 25 bps on the Fed funds rate, I predict something creative with the discount window. Maybe just a 50 bps reduction in the rate; maybe something more dramatic.

Finally, for the “guidance” section, I expect them to say once again that the risks to growth and inflation are “balanced” (or at least “uncertain”). Telegraphing future rate cuts might make the market happy, but it makes no sense; it would be better simply to cut now.

Update 15:15

Official release.

I was wrong about the discount window, but I claim victory on the quarter point itself and on the guidance.  Just this morning, Bloomberg ran an article saying the opposite of what I said:

The Federal Reserve will probably cut interest rates today and lay the ground for more to prevent the economy from sliding into recession.

The Federal Open Market Committee will be loath to repeat language from its last meeting that risks between inflation and growth are “roughly” balanced, economists said. Keeping the phrase would open officials to criticism they’re oblivious to the credit squeeze that’s threatening growth.

They may have ditched the precise phrase, but the overall guidance is perfectly neutral. The statement spends as much time on inflation risks as it does on growth, with increased “uncertainty” being the key theme.

Apparently, the market was expecting something a little more dovish. Wham!