The Worldwide is waiting for The Fed's benchmark rate decision policy

The rest of the world focus will be on how far the U.S. The Fed in the next week will go to in cutting interest rates to revive an economy that most analysts now agree is already in a recession. The Fed as having no reason to go light on its rate cut, according to Avery Shenfeld, economist at CIBC World Markets, which expects a half-point cut on Wednesday after its two-day rate review meeting.

And that's even before economists see the third quarter gross domestic product (GDP) report, which comes out Thursday. The consensus among economists is that the report will show the U.S. economy contracted at an annualized pace of 0.5%.

Even without the latest GDP data in hand, a steady stream of grim economic data, including nine consecutive months of non-farm job losses, has made it abundantly clear that the United States is in recession, according to Meny Grauman, another analyst at CIBC, which projects the shrinkage will be an even greater 0.7%. This makes the expected drop in third quarter real GDP growth less of a surprise and more of a confirmation of an open secret.

But the big picture report on the U.S. economy will be only one of a string of bad reports out of the U.S. through the week, which analysts say will include further declines in new home sales, house prices, consumer confidence, durable goods orders, and personal income and spending.

According to Kathy Lien, analyst at Global Futures & Forex, Ltd. (GFT), the market is now pricing in an 68 percent chance of a 50bp rate cut and an 32 percent chance of a 75bp rate cut.

Table courtesy of Kathy Lien
This indicates that the market believes 25bp will be the minimum that the Fed eases on Wednesday. She believe that a 75bp rate cut will be a too aggressive because it leaves the central bank with next to no room to cut interest rates in case things get worse – and they will.

The three most realistic options are:

1. 50bp rate cut
2. 50bp coordinated easing along with other central banks
3. 25bp rate cut

A coordinated easing will probably have the most significant impact on the financial markets and given the drop in oil prices and the deterioration in European economic data, the ECB and the BoE may not be opposed to this option.

Although the Fed may have considered a 25bp rate cut earlier this week, they know that if they under deliver now, the consequences for the equity market could be severe. A larger interest rate cut could put a stop to the dollar’s rally.


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Sources :

1. Kathy Lien: Fed Fund Futures Pricing in 75bp Rate Cut on Oct 29?!, October 24, 2008
2. The Financial Post: World markets await U.S. interest rates decision, October 24, 2008

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