The Fed Bernanke does not always do what markets expect; however, market expectation of cutting 0.25 is rational.
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Fed Moves & More Earnings
By Patti Domm
Executive Editor
cnbc.com
| 29 Apr 2008 | 05:14 PM ET
Even as the Fed meets, the Street can't make up its mind about what the Fed should do. From discussions I've had, it's clear that the sentiment among some traders has shifted and continues to shift.
The Fed is widely expected to cut a quarter point, taking the target Fed funds rate to 2 percent. Many expect the Fed to also signal in its comments that it's ready to stop cutting and that it sees inflation as a risk.
Yet, there's been a clamor in recent days for no cut at all, a move traders see as stabilizing for the dollar. A stronger dollar would in turn help tame the rise in commodities and in particular, oil.
Kevin Ferry of Cronus Futures Management is one of those who thinks the Fed should take no action on interest rates.
"We no longer see the market demanding that price. If they reduce the cost too quickly...the banks lose the ability to heal themselves. Some stability on rates allows them to normalize the curve and work out their problems," said Ferry. He says the rising yield of the two-year Treasury has been signaling that fear is leaving the market.
"The key for them is the expectation of inflation, which is clearly growing in the public's eyes," he said. Some traders have suggested that stocks could sell off Wednesday afternoon even if the Fed does cut rates, as expected.
"If they cut and the stock market doesn't respond...that puts the Fed in a tougher bind," he said. If they don't cut, "there will be some volatility if we're right..But we think the market will view it better, the world will view it better if they stop."
The Fed has been walking a tight rope between the dual threats of slowing growth and rising inflation. But it has chosen to cut rates to keep the economy from toppling further as it works through the credit crunch. The Fed is also likely to cut the discount rate and it could signal it will take some other steps to keep markets liquid.
"The Fed has to decide whether the risk of cutting a measly 25 basis points is worth the risk of further U.S. dollar sell off and subsequent rise in commodity prices," says Andrew Busch, global foreign exchange strategist at BMO Capital Markets.
"(Fed Chairman Ben) Bernanke has an opportunity to show some backbone to the market that the Fed doesn't always reduce interest rates because the market expects them to cut. Sometimes the central bank has to take a tough stand and decide what's best in the long run," Busch, a CNBC contributor, told me in an email.
The Fed's two day meeting began Tuesday morning and ends with a 2:15 pm. statement Wednesday. In the meantime, there's other data and earnings news to consider.
Tuesday's Numbers
Stocks were mixed Tuesday—the Dow Jones Industrial Average shed 39.81 points to finish at 12831.94 and the S&P 500 lost 5.43 points to finish at 1390.94, but the Nasdaq eked out a 1.7-point gain and wrapped up the day at 2426.1.
Nymex crude oil for June delivery fell $3.12 per barrel, or 2.6 percent, to settle at $115.63. The dollar was higher against both the euro and the yen.
Econorama
The first look at first quarter GDP will be released at 8:30 am. The number is expected to show slightly positive growth of about a half a percent, but possibly less.
Then there's the ADP employment report, which acts almost as a preview of the government jobs report Friday. That number is reported at 8:15 am. The employment cost index is reported at 8:30 and Chicago purchasing managers data is released at 9:15am.
At 2:15pm ET, the Fed issues its rate decision and statement. Weekly oil inventory data is reported at 10:30am ET.
Earnings Central
Companies reporting earnings Wednesday include General Motors, Procter & Gamble, SAP, Time Warner, Constellation Energy, Hess, Southern Co, Kellogg, Kraft and Interpublic. After the bell, Starbucks and Sunoco report.
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