The market is off to an excellent start today on the strength of not disastrous earnings reports from investment banks Lehman Brothers (LEH) and Goldman Sachs (GS). Financials (XLF) are leading the way with a gain of greater than 6%.
All eyes now turn to the Fed decision, due to be released in about an hour at 2:15pm EST.
Many market participants expect an unprecedented 100 basis point cut in the fed funds rate from 3% to 2%.
The range of possibilities is probably 50, 75 or 100.
A 100 basis point cut would be nirvana to the stock market probably resulting in a further pile on to todays already substantial rally. We’ll probably see another 400 point up day on the Dow under this scenario.
A 75 basis point cut would be a mild disappointment at this point. Stocks would probably tail off a bit in to the close though any selloff would probably be mild.
A 50 basis point cut, however, would disappoint stock investors and result in a big selloff. All of todays gains would likely be evaporated by the close.
The key point, in my opinion, is that the Fed knows this. They’ve worked so hard over the last week to stabilize financial markets. Would they really destroy any confidence they’ve built with a 50 point cut?
I’m expecting a 100 basis point cut and would put the probabilities this way:
50 point cut: 15%
75 point cut: 35%
100 point cut: 50%