FOMC Announcement Preview

Extracted from Briefing.com at 13:19 ET

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FOMC Announcement Preview
The FOMC announcement will be made at 2:15pm ET with the current Fed probability rate standing at a 67.8% chance of a 25 bps cut (57.5% a week ago), a 30.1% chance of a 50 bps cut (29.7% a week ago), and unchanged at 2.1% (5.1% a week ago). Recall last time the Fed met in late October, they eased the funds policy rate to 4.5% (KC Fed pres Hoenig dissented against the committee's decision in favor of no ease) and left a neutral bias in the policy statement. The Fed speak held to the party line until approx three weeks ago when Fed Chairman Bernanke and Vice Chair Kohn stoked expectations for an ease as they stated liquidity problems in the credit market and their drag on housing already in recession add to risks tied to high energy prices, plunging confidence and the weaker economy expectations. The market was unofficially warned that December easing was possible. Its now been taken as a given. In Briefing.com's opinion the Fed will do a 25 bps cut, leaving a larger 50 bp on the table in case a larger financial/economic stumble/crash were to occur. The Fed has other tools at their disposal to use in the meantime. The wording of the statement can allude to another or even larger ease if conditions worsen and thereby provide the same market effect. To free up liquidity the Fed could ease the discount rate a larger 50 bp and still keep a positive (25 bp) spread to funds. By keeping a penalty spread to funds the Fed maintains more control over the amount of reserves pushed into the banking system. The increased generosity in discount borrowing would also help support the strong year end liquidity demand required to dress up year end corporate balance sheets. The NY Fed recently lengthened RP terms over year-end and loosened the terms of securities lending. The Fed could do the same for discount borrowing by lengthening the 1 month term set in August to say 3 months. Other changes may mimic those used by foreign central banks including the range of collateral accepted. There's room for creativity but simplicity has its advantages... Briefing Expectations: On September 18 after a 0.5% cut in the Fed funds target, the S&P surged 43 points. On October 31 after a 0.25% cut in the fed funds target, the S&P gained 18 points. The market has rallied more in advance of the announcement this time compared to the two previous occasions, however, so a subsequent rally of similar proportions is a long shot. There is even a chance that some "sell the news" reaction occurs following the announcement. The stock market has had a good run on recent economic data which have reduced the worst fears for the economy, and on the belief that within months the worst of the subprime mess may be over. There is still the problem of a likely sluggish economy and weak earnings growth in 2008, however. Markets and futures have been trading in a fairly tight range today ahead of the announcement.

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Take caution on "The market has rallied more in advance of the announcement this time compared to the two previous occasions, however, so a subsequent rally of similar proportions is a long shot. There is even a chance that some "sell the news" reaction occurs following the announcement."

Nothing is certain!