Will the Fed Really Cut Rates Twice in One Week?

This is what I'm worried about. The market got severely oversold and has had a nice bounce as a result. We are not out of the woods by any means. Most market participants will want to see a nice rebound out of the oversold condition, and another leg down (preferably with signs of capitulation). How long will this current rally last? It's hard to know, but I think it could face some issues as early as next week.

After the Fed's emergency 75 basis point rate cut on Tuesday, a full week before their scheduled meeting, the futures market immediately priced in another cut for their upcoming meeting. At first the market was expecting another 75 bps, but now it is down to 50 bps. Do you really think Bernanke is going to cut rates again next week? I'm not so sure.

The point of an emergency cut is to act early because they don't think they can wait. In this case, they didn't want a market crash on Tuesday (overseas markets were indicating a 5% drop of 600 Dow points). By moving one week early the Fed averted such a meltdown, but I would think there is a good chance they simply pushed up their move to accommodate the markets (we can argue whether this was warranted or not, but that is why they did it).

If so, why would they cut again next week? Will they have gotten any new data in a week's time that shows things have deteriorated since the last cut? If not, how can they justify cutting rates more than 1% in such a short amount of time?

Call me skeptical of the market's thinking on this one. Next week should be another interesting week, albeit less exciting if you are long equities.

Comments

[abbottmd:]

the fed is so far behind the curve being dictated by the credit markets that they need to cut again. market will crash if they don't. it is a vicious cycle they now find themselves in.

2008 Jan 27 10:19 AM

[mavericks:]

The quick rise back up in commodity prices last week makes me wonder if the Fed is going to cut again too. Though I think the market would quickly retest 1250 on the S&P and 11,500 on the Dow...there seems to be alot of support there since that is where the VIX spikes up to 35-38, which is where alot of institutional traders will buy and/or cover. Bottom line is we're going to be in a trading range of 11,500 to 12,500 on the Dow for the forseeable future...unless the Fed caves and cuts again!!

2008 Jan 27 11:46 AM

[contraxism:]

www.marketoracle.co.uk...

2008 Jan 27 12:23 PM

[firboy4:]

If for no other reason, they won't cut rates just to save face. If they cut twice in one week, it says that they made a mistake earlier in the week by not cutting enough. In one week, they won't know if it was enough or not. If they cut again, it will be in a month or more. But then, what do I know? I'm just a caveman.

2008 Jan 27 05:38 PM

[firboy4:]

And I think the Fed isn't so interested if the stock market goes up or not, but rather if more "good" loans are produced getting business going better. And though I trade stocks for a living, I too am more interested in seeing our economy jumpstarted. The stock market will follow soon enough.

2008 Jan 27 05:40 PM