• Home ::
• Fundamental ::
• Interest Rates ::
• After the March Fed’s meeting – just enough

• Send
• Print
• Add To

d593a3de-bb21-4858-8c24-7cfefcce47fc

0

0

After the March Fed's meeting – just enough

Wed, Mar 19 2008, 12:14 GMT
by Przemysław Kwiecień

X-Trade Brokers, XTB

Yesterday the Fed decided to cut all interest rates by 75 bp. After this decision the main rate is at 2,25%, whooping 3 percentage points less then 8 months ago. What’s more, the discount rate (at which commercial banks may borrow directly from Fed) is at a mere 2,5% compared with 6,25% in August 2007. Even though 75 bp is definitely not a moderate adjustment, the markets were somewhat disappointed. The whole havoc around Bear Stearn’s problems and an eventual takeover by its competitor (JP Morgan) pushed market expectations to 100 bp. Therefore a corrective move on the EURUSD and other major currency pairs with the dollar seems understandable. Although a large part of this move has been already reversed, a probability of a slightly deeper correction is now higher. A potentially stronger support on the EURUSD lays around 1,5350.

In the longer perspective, the fact that Fed cut rates by 75bp instead of 100 bp does not really matter. Since the monetary policy affects the economy with a lag of few quarters, it is incredibly hard to asses, how the (already implemented) cuts will stimulate the demand and inflation. One could easily compare Fed officials to a driver without lights in a foggy night, who steers his vehicle in a way he hopes is correct, but at a high risk. The only difference is that the Fed, unlike a driver, may not stop this car to wait until the air becomes more clear.

Therefore, the really crucial thing for market participants is the impact of the current and past Fed policy. It should be visible in the second half of this year and will translate into a mixture of growth and inflation. Prices of equities and currencies will adjust to the composition of this mixture. We can imagine three clear cut scenarios, but obviously the reality is likely to bring about something between them. If we get a rebound in growth with a moderate or no rise in inflation (optimistic scenario) we can well expect stock indices to shoot up and the dollar to reverse some of its loses. If we get a mounting inflation without a rebound in output (a pessimistic scenario) we will see a stronger dollar but stock indices plummeting. Finally, we may get no growth neither inflation, which would leave us with both the stocks and the dollar sinking further.

Published on  Wed, Mar 19 2008, 12:14 GMT