Everyone is expecting the Federal Open Markets Committee (FOMC) to come in later today with a significant cut in the Fed Funds rate following its March meeting. Estimates in the general business media range from 50 basis points to 100 basis points, a full 1% pushing the rate from 3% to 2%. That would leave the Fed with very few bullets and continue to ignore disturbing inflation data.
Perhaps the best gauge is the market and based on the April 2008 Federal Funds futures contract traded at the Chicago Board of Trade, the market is expecting a full point.
One trader on the floor expects equity index markets to react positively to even a 75 basis point cut but if the Fed comes in with anything lower, our trader says, “It will get ugly to the downside.”
With such aggressive market expectations continuously being met by Mr. Bernanke and the Fed, you have to wonder what will happen if the economy does not turn around quickly. A full point rate cut leaves the Fed with very little ammunition. All the experts we talk to expect further subprime fallout and say the we are still not close to seeing the complete magnitude of the current credit crisis.
At the current pace, the Fed will run out of bullets before we run out of stories of further write downs, declining housing markets and investment banks at risk.
