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| The FOMC and Their Next Move |
Here it is, the eve of the Federal Open Market Committee’s rate decision, and the Fed Heads are betting on a 50 basis point cut. This is almost a given based on the Fed Funds probability chart from the Cleveland Fed. They made their move on January 22 with the 75 basis point cut, but the market hardly responded. I have to believe that Mr. Bernanke and his cronies were hoping for more of a boost than they got. They just fired one of their bullets and barely wounded the bears. Fortunately for the Fed, unlike Barney Fife, they have more than one bullet. I look for the Fed to fire another bullet tomorrow when they cut the Fed funds rate to three percent. Like I said, this is almost a given and the reaction will likely be muted if this is what the Fed does. The better question is, what will the market do if the Fed cuts only 25 basis points? If the Fed only cuts by 25 basis points, they better have something in the statement about making a move between meetings, because the next meeting isn’t until March 20-21. Because the next meeting is almost two months away, I think traders expect the 50 basis point cut. Should the cut only be a quarter, the market will get spooked unless they indicate there is a plan for action between meetings. Don’t forget that the advanced release of fourth-quarter GDP comes out tomorrow morning, and estimates are for a meager growth rate of only 1.25 percent, which would be the slowest growth rate since 2002. The housing crisis continues to affect the overall economy. Residential investment is expected to show a plunge of 24 percent, which would be the worst drop since 1981. With the Fed using their bullets as rapidly as they are, the economy will have to start responding quickly, or we will have a situation like Japan. The Bank of Japan’s overnight lending rate has been below one percent since September 1995. This essentially leaves the bank helpless. Cutting interest rates from 0.5 percent to 0.4 percent doesn’t do much to invigorate the economy. Mr. Bernanke and company had better be careful about how quickly they use their ammo. Good luck and good trading, Rick P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.
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