Fed Rate Cut No Shoe-In - WSJ

Includes: AGG, DIA, SPY
by: SA Eli Hoffmann

A widely-predicted Fed rate cut this week is not a shoe-in, and officials are not considering a half-point cut in the fed funds target rate, the Wall Street Journal said Tuesday. The article's author, Greg Ip, is thought to at times reflect views of senior central bankers. Ip said Fed officials see Wednesday's decision as a choice between a 0.25% to 4.5% to further stimulate weak housing and credit markets, or no cut at all. Perhaps the biggest challenge the Fed faces, he said, is dealing with the Street's certainty of a rate drop: "The current market environment is more fragile than usual, and thus the consequences of disappointing the market are potentially more damaging. Against that, the Fed will have to weigh the risk that a cut will stoke inflationary psychology," Ip wrote. Currently, the implied probability of no change was 16%, according to data analyzed by the Cleveland Fed; the probability of a quarter-point cut was 72%, and of half-a-point cut, 10%. There has been little evidence that a weak housing market has spilled over into the broader economy, thus Fed officials "don't appear to have significantly altered their forecast of a return to moderate growth next year," Ip writes. Tokyo-based currency traders said the article helped push the dollar up slightly from near record lows against the euro in overseas trading, Reuters reported.

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