Federal Reserve January 30th Meeting: What to Expect

January 29, 2008

All eyes are locked on the Federal Reserve’s interest rate decision on January 30th, which is tomorrow - Will they cut by 25, 50 or 75bp?

Shortly after the emergency rate cut, there was a decent chance that the Fed could make two back to back 75bp rate cuts. But since then, traders have become far more realistic by realizing that the world has not come to an end and stocks have stabilized. As a result, rate cut expectations have eased with the futures market now pricing in a 72 percent chance for a 50bp rate cut and 28 percent chance of a more conservative 25bp cut.

What has changed since the last official Fed Meeting?

According to the following tables since the last official Fed meeting in December, the labor market, housing market and the service sector have deteriorated. Inflation has eased and the manufacturing sector has fallen into a recession. Stocks also dropped 2000 points, necessitating last week’s 75bp emergency rate cut.

What has changed since the 75bp Emergency Cut?

However since last week, stocks have rebounded 800 points, durable goods increased strongly in the month of December, gold prices have hit record highs while oil prices have moved higher. This gives the Fed the flexibility to cut interest rates by 25bp instead of 50bp, but will they?

The answer of this question really lies in whether the Fed wants to “at the curve” or “ahead of it.” By the end of this year, I expect interest rates to come down to 2.50 percent, which is 100bp from current levels. The Fed can either get half of that out of the on Wednesday and enjoy the benefits of easy monetary policy throughout the second half of the year OR they could cut by only 25bp and work for each tenth of a percentage point increase in GDP.

Either way, I do not expect the FOMC rate decision to be dollar bearish because only 3 things can happen:

1. Fed Cuts by 50bp, Tells the Market They Need to Ease Rates Further
2. Fed Cuts by 25bp, Tells the Market They Need to Ease Rates Further
3. Fed Cuts by 75bp

Posted in FOMC, FOMC Minutes, Fed Rate Cut, Fed Rate Cut Expectations, Federal Reserve, Forex News, US Dollar, US Economy