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(I’m not linking the song that shares this title. I’ve never liked REO Speedwagon), comparing the 25 vs. 50-basis point question facing the Federal Reserve to the “will they / won’t they” decision in a formulaic romantic comedy, must have put an ’80s power ballad into my head. Regardless of the source, I have been forced to reckon with the nagging suspicion that tomorrow’s FOMC meeting has the potential to be a major “sell the news” event.As I type this, the markets have not fully coalesced around a consensus outcome for the rate decision. The currently shows a 60/40 split in favor of the larger cut, though that is down from 70/30 yesterday and earlier today. Meanwhile, the shows a 72% chance that the rate will be set above 4.875% tomorrow. Normally there is sufficient guidance from the talking heads at the Fed that those probabilities approach 90-100% for a given outcome. Thus, we go into this FOMC meeting with far less clarity than is typical.Over the past few days, I’ve been laying out my case for why I favor 25bp over 50bp. , noting:
Furthermore, a week ago, when expectations strongly favored a 25bp cut, extra considerations:
As I read through these this morning, I still believe that the Fed should still lean to 25bp. But years of trading experience has taught me to respect the message of the market, and that message has been saying 50bp. A long-time market watcher reminded me this morning that it is unlikely that the Wall Street Journal’s Fed whisperer would have penned a story that left the door open to 50bp – during a quiet period, mind you – that didn’t reflect the message that the central bank wanted to portray.Yet that’s where the problems may come in.Of course, there will be widespread disappointment if the Fed opts for 25bp. Equity markets always crave more liquidity, and at the same time, bond markets have all but priced in an aggressive rate-cutting path for future meetings. The smaller cut would bias against both.But what if we get 50bp?Much depends upon the messaging.
Finally, assuming we close at the levels we see at midday, it would be the seventh straight-up day for the S&P 500 (). That is a long streak and implies that a significant amount of good news has been priced into equities. The Fed will need to deliver even more good news to keep exuberant equity traders happy.More By This Author:
