What will the Fed do when it meets tomorrow?
Although a rate cut looked highly unlikely just last week, Merrill Lynch economist David Rosenberg now says the central bank could lower the federal funds rate by a half point—to 1.5 percent—tomorrow.
From Merrill Lynch:
Look for -50bp on Tuesday
The market is now almost fully pricing in a 25 basis point rate cut tomorrow. However, in the current environment we think the Fed may feel the need to get in front of the situation with a more aggressive move. We had expected the Fed to cut 50 basis points in the first quarter of next year as inflation rolled over and growth slowed sharply. Recent events suggest a large deleveraging of the banking system is picking up steam and suggests the risks to the economy are entirely concentrated in the growth outlook (inflation concerns will take a back seat, or move to the trunk). In that environment, it makes little sense for the Fed to wait. While the timing is still highly uncertain, financial conditions are tightening to such an extent that we think it makes perfect sense for the Fed to cut rates by 50 basis points on Tuesday and we may even see additional moves as conditions warrant (the risk of only going 25 bps at this juncture is that it will be viewed as too tepid a response to these epic contractionary events).