My Guess: A 25 Point Fed Cut

Includes: DIA, QQQ, SPY
by: Toro

Last week, I pontificated that the Fed might be setting the market up for a fall.

So I'm going to set myself up for a fall, and predict the Fed will cut the Fed funds target by 0.25% (thus guaranteeing the Fed will cut 0.50%. - ed.). I am not an economist and I'm not a Fed watcher, so this is merely rank speculation.

Here is a history of rate changes since 1990. At no time has the Fed ever cut 1.25% at a meeting or cumulatively within eight days.

Is the economy currently so bad that the Fed would have cut by 1.25% on Wednesday had they not come in to save the stock market last week? The economy is slowing, and probably going into a recession, but the fact that there is even debate whether or not the economy is going into a recession makes one question the notion that the Fed would make the most dramatic move it has ever made in this modern era of Fed transparency.

Such action also goes against the grain of the Bernanke Fed. Moving 50 bps would repudiate the actions taken by the FOMC so far. Bernanke and the members of the FOMC have made it pretty clear that they were going to follow their own course, not that set by the caterwauling of Long-and-Strong equity investors.

Well, at least until last Tuesday. But given the unknown unknowns at the time, I certainly understood the Fed's dramatic move.

My guess is that had the market not tanked last week, the Fed would have cut 50 bps on Wednesday. Now, I think they'll cut by 25 since if they don't move, the market will get utterly hammered. And isn't that what the Fed was trying to avoid last Tuesday?

Equity traders are screaming for another 50, or at least many commentators are on Bubblevision. They may very well be right, I don't know. When I checked on Monday, the market was assigning the probability of a 50 bp cut at 86%. And eventually, I believe the Fed funds target will bottom below 3%. But my guess is that the Fed will not want to be seen as the stock market's bee-atch. Thus, don't be surprised to see 25, and a statement not as dovish as the market expects.