The Guessing Game: 0, 25, or 50?

I don’t remember exactly when was the last time a FOMC meeting has generated so much anticipation, but it has to be quite a while as the Federal funds rate, the outcome of such a meeting, has been held steady for more than a year since June of 2006. For the past 15 months, investors have been getting almost identical policy statement from the Fed when each and every meeting concluded. This time, things could be different.

From what I heard, the consensus seems to be that there will be a rate cut as arguments for an ease appear to be quite strong. Weak employment data, soft retail sales, mild inflation, slumping housing market, and rising oil price all point to a rate reduction. The only question is whether it’s a quarter of a point or a half.

However, before we get the announcement in less than 5 hours, everything we think could happen is just a guess. If it’s a guess, then is it possible that we get a surprise instead when the policy makers decide to leave the rate alone this time to let last month’s discount rate cut play out? Or they can just slash the discount rate again without touching the benchmark rate. Not a likely scenario but not impossible either. If that happens to be the case, it would be interesting to see how the Street reacts to the decision when investors realize their wish is not granted.

If we get what we wanted at 2:15 pm EST, the reduction itself which will be the first in four years, whether it’s 25 or 50 basis points, may not carry a significant message. What’s more important is what Ben Bernanke & company has to say in the statement, from which investors will try to find a clue on what the Fed will do next.

But now, all eyes are on the Fed.

If you enjoyed reading this post, please consider subscribing to my full RSS feed (What's RSS feed?). Or you can also choose to have free daily updates delivered right to your inbox.

• Ready to buy stocks/ETFs with zero commission? Check out the Zecco review and try Zecco Trading to get 10 free trades/month.
• Seeking higher returns for your cash? Take a look at the latest interest rates from leading online banks and find out where to get the most for your money.