Another Meeting, Another Decision: 25 or 50?

By Sun on Jan 30, 2008 in Random thoughts
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Since the Federal Reserve’s 75 basis points emergency rate cut on January 22nd, the Dow Jones Industrial Average has gained more than 500 points in 5 trading sessions ended yesterday. The rally was partly fueled by speculation that when policy makers conclude their 2-day meeting this afternoon, another 0.50% rate reduction will be handed out at 2:15 pm EST. When the Fed made the inter-meeting cut 8 days ago, the stage was set for more follow-up today. The only uncertainty is by how much, not if.

So what’s your guess? 25 or 50?

Though I would love to see the Fed grants investors’ wish with a 50 bps reduction to keep the rally going, my guess is that we may only get 25 this time. Lowering interest rate by 1.25% in 8 days would be too dramatic for the central bank which wants a stable, transparent policy. Besides, they certainly don’t want to give people the impression that they are pushing the panic button, especially when there was no coordinated action from the European Central Bank.

If we indeed only get 0.25%, the 500+ points gain could evaporate very quickly.

We’ll see what happens in 3 hours.

Edit: So investors got what they wanted from the Fed, but the stock market barely moved from the news. After briefly surged more than 200 points after the Fed’s 0.50% rate cut announcement, the Dow closed down 37 points. That was the level before the rate decision.