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March 17, 2008
FOMC meeting tomorrow
Anyone care to hazard a guess as to what they will do tomorrow?
The Cleveland Fed shows the above graph with the probabilities based on the fed funds futures. 75 basis points is the leader right now with 50, 100, and 125 (!) basis points all getting votes. The futures market is predicting a 50% probability of 1.5% by the next meeting. Clearly there are two likely ways that could happen--either 75 bp twice or 100 tomorrow and 50 next month. I'm not saying it can't happen.
But let's look at this coldly and rationally as we always do. What in the world would a 100 bp cut do to help the liquidity crisis (and the solvency crisis) that was at the root of this weekend's troubles? Nada. The announcement of the new lending facility did much more to steady everyone's nerves than a full percentage point cut ever will. Let's see if that works before spending more interest rate ammunition. How about 75 bp? Again, I'm hard pressed to say it will help the ways that are necessary. The market expects it, and as much as I'd like to say that the Fed should have the guts to disappoint the market, I'm sensitive to the counterargument. This is a likely outcome.
How about 50? It's less likely, but more desirable in my view. It wouldn't drastically undercut the market. This was the expected outcome for all but the last couple days. It would probably contain the fall of the dollar (somewhat) and signal that the Fed expects a more stable environment going forward. I would applaud this choice.
How about 25? A bit risky from the Fed's point of view, I think. It would undercut the market more than is necessary on this given day. I'm sympathetic to the hawks, but given the totality of the situation, 50 is probably the better choice.
Going to be a fun day of class tomorrow! Until then...
Posted by William Polley at March 17, 2008 08:45 PM
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