Anticipating Today's Fed Action: Fool Me Twice....

High hopes for a 100 basis point Fed rate cut later this afternoon has buyers finding their way to equities, with advancers leading decliners today in large numbers.

All eyes are on the Fed, with high hopes for a 100 basis point rate cut. The treasury market has already priced it in, and the Fed has not failed to disappoint treasury expectations yet. Time and again, I've been caught listening to Fed words rather than realizing the market is the best predictor of Fed rate action. This is only exacerbated now, while the Fed faces an environment where circumstances dictate avoidance of market disappointment. Therefore, if I were foolish enough to bet on Fed action again, my wager would be on the big rate cut this time around, whether it be 75 points or the 100 mark the treasury market is pricing in.

Now that I've said it, they will of course only move by 50 points, which is what I really believe is the amount they should move this time around. Still, I recall that period this past November and December when Bernanke flat out said he would not cut, repeated it in mannerism and language at a follow up address, and then got in line behind his elder at the Fed and the President, and cut rates by exactly what the treasuries had priced in. Thank God he did, but he proved a little shaky a leader in the process.

In fact, the whole group in Washington has been quite the reactionary bunch. Treasury Secretary Paulson finally said something indicating an expectation for recession. He said the economy was experiencing a sharp downturn. Really? What do you know! Hey, I don't know about you, but I was thinking, it's about $#$% time!

You can only play the PR game for so long before you just end up angering the world's economists, strategists and investors out there who know you are just singing a tune that's supported by a view that we're all stupid. Putting yourself in their shoes though, scaring consumers out of the mall by forecasting the obvious recession would not serve any good purpose either. So, while their cheerleading has been annoying to the wise, it may have been wise for the whole.

Producer Price Index

Inflation signs were completely ignored this morning, since the market had already binged on panic on St. Patties Day morn. While the headline figure showed a rise of 0.3%, short of expectations, Core PPI jumped 0.5%. That compared to expectations for a rise of 0.2%. Panic was also put off since changes in producer prices do not translate in a predictable manner to consumer price changes, at least not over the short term. However, allow me the opportunity to frighten.

February's price changes missed the recent rocket rise of commodities, including oil and distillates. It seems clear to me the headline figure will be higher in the March report, and these prices should find there way to your pockets soon enough. I was forecasting this long ago, and it's started playing out finally and even caught consensus recognition at this point.

Nothing has changed. However, the Fed has high hopes domestic recession will help ease pricing, while at the same time doing its best to stave off recession. However, globalization and strong domestic demand for goods and services in emerging Asia might keep the domestic supply/demand equation tight and spoil Bernanke’s plans.

The ECB maintains its anti-inflationary stance, which was evident in its decision to keep eurozone rates steady at its last meeting. This view was reinforced yesterday in a comment of an ECB official. While the ECB has the luxury of a less needy economy at this point, it seems clear that in the end, either Trichet or Bernanke will be proven genius and the other the fool.

Either way Benjamin, I will not play the fool again. I’m betting with the treasuries today.