Oddly enough, that article is also stating that there shouldn't be any cut whatsoever. But FFIR seem to imply differently.

The run up to the October decision is similar to the run up to the September decision, as FFIR are signaling cuts, while analysts are divided into camps of FFIR followers, skeptics, and non-believers. FFIR followers believe the Fed will follow what the markets are pricing in no matter what. Skeptics think that while there are reasons for the Fed to stay on hold, the central bank may still follow the market. Non-believers think there's no reason to cut, that the Fed won't do it, and that they're idiots if they do.

In this case, I think I'd have to define myself as a skeptic, but I'd love to see the Fed surprise the markets and not cut rates. I'd have a bit more faith in them in that case.

I'd also like to note that this particular article does quite a bit of quoting of Poole, who is one of the most publicly hawkish FOMC members aside from Fisher...

Thing is, I've asked multiple times on different forums. No one seems to remember a time when FFIR showed a 100% chance of cutting when the Fed ended up not cutting. That being the case, it doesn't matter if you're a follower, skeptic or unbeliever. History shows that it happens when FFIR shows 100%.

If the fed doesn't ease will that be a case of win-win. Fed ease's market rallies as the magical elixir is given to prolong surgery. If the fed doesn't ease market rallies bec. they feel that the "Fed is all knowing and more powerful than their own analysts and must know that the US economy is alright and can weather the storm?" Or.....

If the fed doesn't ease market sells off bec. they are expecting the ease and then "things are worse then we thought?". If the fed does ease then we sell off, bec. its already baked in the market?

How's that for covering the bases. Sentiment going into the news will be key.


I've said it in another forum, without the financials, the market will have an extremely diffic. time climbing new high's.


Euchre

Disclaimer Trading Currencies involves risk. Any opinion, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice.

Sorry, don't agree. The Fed not easing when the FFIR is 100% showing an ease would be a nuclear bomb on the markets. Expect equities to plummet, the carry to get stomped on royally, and all hell to break loose. The market hates surprises, and while most truly think deep down that the Fed should do nothing, we all know in our heart of hearts that they will pander to the banks.

Ivanovich- As I was drafting my note my original subject was to Terri-
"You must have some Dec Puts on the Spoo' . I guess I wasn't clear I was just trying to paint things sentiment wise. This market should never have rallied past the old high's after this credit crunch; however markets can stay irrational a lot longer than we traders can remain solvent. When you can't value certain stocks, etc and credit seizes up; ok yeah lets ramp goog and csco and rimm and aapl and the industrials, etc. I am not backpeddaling I am basically saying as I said earlier I gave both sides. Flip of the coin. I think that tells me that Euro and Cable are range bound until next week any stock break out/down will reverse. How long will this sideways goes, the longer the chop the longer the move when it does come.




Euchre

Yeah, if the bank does nothing, expect the Dow to drop several hundred points in a matter of minutes.

Welcome to the world of "moral hazard". You shouldn't be taking such large risks with your business practices, but now that you did, we will have little choice but to improve market conditions so that your stupidity does not affect the broader economy.

I don't necessarily think that the Fed is now "pandering" to the banks, though it may seem that way. If the banks are totally s.o.l., then this will translate into very poor lending/confidence conditions for broader businesses and, eventually, the broader economy.

Though the populist media likes to spin it as "favoring wall street over main street", I think it's not so cut and dry.

Not sure that I agree that cutting will do anything to help. It certainly isn't going to help a subprime borrower get a refinance or a new loan. The issue with risk is already out of the bag. It's not going to be incorrectly priced going forward. Banks have already taken massive write-offs and accounted for their share in the debt. Mortgage rates certainly haven't come down much from the last half a point drop in FF. On the opposite end of the spectrum, assets like oil and gold have spurred to new highs. The stock market pushed new highs. Markets in Asia have launched like rockets into a parabolic euphoria. Food prices have launched, and all for what? To supposedly provide liquidity? If that's the case, drop the discount rate, leave the Fed rate alone.

John Q. Public is not benefiting from any rate cutting. Quite the opposite.

A correction in the market is healthy. Trying to stop one from happening is successful in the short term, but only proves to be more disasterous down the road.

These are, of course, just my thoughts.

Ivanovich - the DJIA is the last straw of hope for US policymakers. If it goes, confidence will plunge, spending will stop and unemployment will skyrocket. In an economy where more than 20% of S&P 500 is financial the equity markets are key.

Fresh off the presses, this is an interesting speech on why the Federal Reserve feels compelled to act on broader lending and credit market distress:

http://www.federalreserve.gov/newsev...n20071026a.htm

Oh, I hear you, and I understand completely. But news flash to the "sheeple" of the US, they don't really have more wealth because of the S+P's rise - not when you compare it with the value of their dollar.

Excellent paper, good find, David. The above paragraph (the second to last in the paper) is an interesting tidbit, seemingly in conflict with itself.

"Any such lending must be temporary" to avoid exacerbating moral hazard. There's nothing temporary about the Fed's 50bps cut, unless they plan on revoking some of that this coming policy meeting in some fashion or another. In fact, they've spurred on and rewarded moral hazard by creating fresh liquidity. Look at the carry trade. Look at oil and gold. Does that appear that the market has pulled back on speculation?

In regards to the moral hazard of subprime, I would argue that the market prevents moral hazard when it crushes those who invest poorly and make risky decisions. The market does it without the Fed's help, through the normal course of corrections. When we act to prevent and hold the market from correcting on it's own, and artificially prop the market up, we exacerbate the problem.

At least that's what I see. Feel free to show me the err of my thinking

Well, "temporary" in Fed speak may be something on the order of 6 months or a year. In this case I think he's more or less saying that they stand willing to boost liquidity (and perhaps lower rates) as credit/lending problems persist. As we highlighted in the credit section of this past week's "Watch what the Fed watches" report, credit market conditions have actually worsened through recent trades and relevant indicators remain at or near levels seen through the peak of "subprime" duress in August/September. This definitely leaves the Fed in a monetary policy accommodation/liquidity-boosting mode.

Tough to disagree with you here, though there are definitely shades of gray in what may or may not constitute "moral hazard". Some might argue that any attempts to bolster credit conditions during times of difficulty may encourage excess risk taking. This is perhaps true, but I think the Fed's role is nonetheless to provide stability and prevent credit/lending meltdowns from spreading into the broader economy.

Of course, this doesn't mean that the Fed should continue lowering rates at 50bp a clip. I think they definitely run the risk of creating an asset price bubble, as you cite above, and we're already seeing that in commodity markets. Questions remain as to whether the FOMC is willing to apply some "tough love" to the US economy in the interests of longer-term stability.

Hindsight being 20/20, we can confidently say that such efforts post 9/11 and its economic aftermath fostered a housing bubble in the US--its burst is part of what's driving current market instability.

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The Carry trade has remained relatively bid through recent trade -- largely a product of very strong high-yielders and a relatively stable Japanese Yen. Yet the future direction of the risk-sensitive trading strategy will largely depend on the reactions to tomorrow's FOMC decision. Given the strong correlation between stock markets and interest rates, it will be very important to monitor how the US Dow Jones and other major indices react to the release.

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The Dow is still holding below resistance at the 61.8% fib at 13,896. I think the index's next move will be largely dependent upon the FOMC decision, but this is a great reversal point. I would not be shocked to see the Dow plummet from these levels, and the risk aversion that would ensue could help unwind forex carry trades a bit as well.

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