What the Fed Funds Rate Cut Could Really Mean?
The short article below was in this morning’s WSJ. These are my sentiments exactly:
No matter what the Federal Reserve does, somebody is in for a surprise.
The Fed is expected to cut the target rate it sets for overnight loans between banks today, but by how much is an open question. Although most firms are looking for a quarter-point cut to 5%, a significant minority, including Goldman Sachs and Merrill Lynch, are looking for a half point. Futures that price off of interest-rate expectations suggest that investors are evenly divided between a quarter-point and a half-point reduction.
That means that if the central bank follows the base case, cutting by a quarter point, there will be plenty of investors who think it is behind the curve. If it cuts by a half-point, some Wall Streeters may worry that things are worse than they look. A half-point cut also would raise hackles among those who think the Fed shouldn't bail out speculators who took on too much risk and lost. (my emphasis)
If the Fed cuts its overnight federal-funds target rate by a quarter point, it could cut the rate that it charges banks to borrow money at its discount window by more as a signal to market participants that it stands ready to prevent credit markets from seizing up. Many market participants expect a large discount-rate cut, but there is a caveat that the Fed might find too large to ignore: If such a cut leads to a substantial increase in borrowing at the discount window, the influx of cash onto banks' reserve balances could push the federal-funds rate well below its target.
Perhaps investors would be better off today by not overthinking about the Fed and instead ask the bigger question: Is the economy on the cusp of recession? If it is, there will be many more Fed cuts, and profit disappointments, to come. If it isn't, then it might be a fine time to buy. (my emphasis)