Unlikely That the Fed Will Cut 50bp

by: Paul Kedrosky

Will he or won't we? Cut, that is. With a Fed meeting is on the agenda this week -- as if you didn't know -- the nattering is non-stop about Ben Bernanke's next action on behalf of the Fed.

(As my friend James Altucher likes to say, of course, who cares? Whether the Fed cuts rates or not, good companies are still good companies, and the effect of the Fed is more psychological than actual, so it's better to trade against it than with it.?

But let's pretend we care for a minute. Given that the Fed Futures rate has locked in on a 25-basis point rate cut to 4.50%, what's the likelihood that it's wrong? Because merely delivering 4.50%, all else being equal, won't do much for the market, as it's priced in. But doing something different, whether larger or smaller, will definitely cause fireworks.

Until Merrill's (MER) recent misadventures, and the spike in credit issues last week, I would have said that there was good chance the market was wrong, and the Fed would hold pat today. Now, however, while that's still a possibility, it looks increasingly likely the the Fed Futures funsters have it right. I still think there is a material possibility that the Fed decides to watch and wait, but it is lower than it was last week.

And the likelihood it surprises the market with a further 50-point cut? Slim, but not zero.

Does anyone out there know, however? According to some new research by ace Fed watcher Ken Thomas, maybe we should be checking with Treasury Secretary Henry Paulson. Because Thomas says that FOIA requests for Bernanke's calendar show that Paulson and Bernanke are bosom buddies, with the two meeting 4.1 times a month. While some of that is accounted for by get-togethers by the Plunge Protection Team, it is also considerably more frequent than many expected.