Fed Decision on Tuesday 18 September

Because of the current credit crisis, Wall Street has been pushing for the Fed to ease rates. Will the Fed comply with this? It seems as though they will but this is not a forgone conclusion. Many blogs pundits are talking about various scenarios. Here are the most common:

1. A .25% cut. This is also known as a 25 basis point cut or a 25 "bip" cut. Bips and basis points being the same thing: each bip is 1/100th of a percent.

2. A .50% cut. AKA 50 bips.

3. No rate change

4. A rise in rates. Most are not talking about this and I feel that this is unlikely but certainly possible.

Why is this Fed meeting so significant? In one sense it's not significant in that the market, via bond prices, has already priced in a Fed cut of at least .25%. In another sense the Fed may just be largely irrelevant. For background on this you should read John Hussman:

http://www.hussman.net/wmc/wmc070910.htm

In another sense, market reaction to a Fed decision could be significant. The stock market could fall or it could rise. But it could always do either of these right? Well, currently, the market is on the high end of the valuation spectrum and is quite susceptible to a fall (read Hussman). On the upside, the market may continue to rally. I would suspect that any rally up will be somewhat limited in time, though, as the housing market continues to deteriorate, which will put more pressure on the banks and various finance related companies. A rally up could, however, be quite strong. I would suggest restraint in participating in such a rally unless you are a pro.

Anyway, the market thinks a rate cut is coming and if the Fed decides not to cut then the stock market might have a serious sell off. To read various ideas and mostly well informed speculation on this, you should check out the comments on this blog posting:

http://bigpicture.typepad.com/comments/2007/09/open-thread-wha.html#comments

The Big Picture is a fantastic blog and I will cite it often:

http://bigpicture.typepad.com/

A note on the current credit/liquidity crisis:

This is probably a crisis of insolvency where various institutional investors bought products that were based on subprime mortgages. Many of these investments are now, at the very least, diminished in value or worthless. To make matters worse, many of these investors borrowed money to make these investments. Here is an in-depth look at this:

http://www.rgemonitor.com/blog/roubini/212919

Roubini has been a bit early in his calls for economic problems, but he has been quite accurate.



Disclaimer: This blog is not a substitute for an investment adviser and is not to be taken as investment advice. You are fully responsible for your investment decisions. Please find a qualified investment adviser.