Next Week’s Fed Meeting

The Federal Reserve meets again next Tuesday and Wall Street expects another rate cut. According to the latest from the futures market, Wall Street thinks there’s about a 60% chance for a 0.25% rate cut and a 30% chance for a 0.50% rate cute.
I think the Fed erred last time by only cutting by 0.25%, and I would prefer to see the Fed cut by 0.50% this time. Unlike a lot of folks, I don’t think it’s absolutely critical for the Fed to get it exactly right all the time. Twenty-five basis points isn’t that big a deal in an economy this large. Still, the market needs some relief.
The odds of a recession have clearly increased over the past few weeks. Three months ago, Wall Street was expecting fourth-quarter earnings growth of 8.8%. Today that number is down to just 1.1%. Also, economically cyclical stocks have underperformed the market since July. I think that will continue.
It’s hard to overstate the importance of interest rates on stock prices. A few weeks ago, I looked at all the data going back to 1962. If you took all the days when the three-month T-bill rate fell, the S&P 500 rose over 2,000%. On days when rates rose—a nearly identical time frame—the S&P lost nearly 60%.

Posted by on December 4th, 2007 at 12:30 pm


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