| Fed Policy : The FOMC meets tomorrow. Last Wednesday, we argued on this page that the Fed would not ease at this meeting. We still hold that view, but will not repeat it here. Instead, we'll focus on various possible outcomes and market reactions. With the market now putting the probability of a 25 bpt cut at just 30%, it's safe to say that a steady policy decision by the Fed will elicit little reaction, or perhaps a slight negative response. Though there haven't been any polls of expectations for the so-called "directive", it is widely assumed that the Fed will re-adopt the easing bias which they shelved at the March 19 meeting. No easing and a failure to adopt an easing bias would be a negative for the market. The real debate revolves around the two easing scenarios: 25 bp and 50 bp. This should be an easy call: since rate cuts are not fully discounted in market prices, any cut should be a positive. But with so many people getting paid so much money to analyze the market, there's always a brisk trade in contrary expectations, even when they don't make much sense. Many market-watchers have speculated that a rate cut, and especially a 50 bp cut, would trigger selling of stocks due to a belief that an easing might indicate the Fed feared more pronounced economic weakness. This is a weak argument for two reasons. First, let's do away with the myth that the Fed knows more than the market. They have access to data a bit earlier than the market, but since when has the latest data yielded a clear view of the economic future? In general, the market will be a better predictor of the economy than the Fed, at least if you buy into the notion that the information contained in the individual decisions of millions of investors is more potent than the forecasts of 12 FOMC members huddled around a table in DC. Second, we will go out on a limb and say that lower interest rates are almost always a positive for stocks. With the market concerned about the state of the economy, who wouldn't want lower mortgage rates that puts cash in the pockets of homeowners, or lower bank lending rates that help spur new business creation? How is this bad? In short, we don't expect a rate cut tomorrow, but if a cut of any magnitude happens, we'll be the first to say it's good news for stocks. - Greg Jones, Briefing.com |
