The Market Tomorrow - Fed Meeting

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The big Fed FOMC Meeting at 2:30pm E.T. tomorrow.

Where’s the market going???

First let me tell you what I believe will happen tomorrow. The Fed will be afraid to cut 50 basis points (.5%) so they will cut 25 basis points (.25%). Why afraid you ask? The Fed will think that a more dramatic cut would lead the markets to believe the economy is headed into recession. It is a very delicate balance, but I believe the Fed will cut 25basis points at this meeting and will proceed with a series of 25basis point cuts. There won’t be any big cuts, but a series of smaller cuts.

So what about the market?

Since I can’t forsee the future, we’ll look at a few scenarios:

• Do nothing - Market will drop like a rock. Market will believe the Fed is dillusional in its assesment of the economy’s state.
• 25 basis - Market will go lower. This is not enough for the market to see a quick reversal of the downward trend in the economy.
• 50 basis - maybe a bump initially, but then lower. Why? Well such a big drop might mean we are closer to recession than we thought. What if we can’t reverse it?

That’s my 2 cents. Trade at your own risk. I’m a seller ahead of the meeting. I think the odds are 70% for a 25basis point cut, 20% for a 50 basis point cut, and 10% for no action.

Happy Trading. May Ben be on your side (hopefully a money-making side).

*** UPDATE 9/18/07 ***

The Federal Reserve unanimously cut its overnight interest rate by a half percentage point to 4.75% citing turmoil in financial markets as a threat to economic growth.

The market and analysts had been expecting a smaller quarter-point cut. The Fed also cut the discount rate by a half percentage point to 5.25% to “help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time,” according to a statement by the Federal Open Market Committee.