Is 25 Enough?

“A quarter point cut in the fed funds rate may not be enough for the markets.”

– Bob Pisani, CNBC’s floor reporter at the NYSE, in a blog post “Fed: 25 Points Might Not ‘Cut It’ With Markets”

When the Fed issues its highly anticipated decision on interest rates today at 2:15pm EST it is widely expected to: cut the Fed Funds rate by 25 basis points; cut the Discount Rate by 50 basis points; and change the policy stance from neutral to a bias towards cutting rates.

It’s really hard to imagine the Fed pausing after all the yapping about being “nimble” and “flexible” a couple weeks ago.  A pause would destroy the markets confidence in Bernanke and probably lead to a big selloff.  The odds of a pause have to be 5% or less.

But the positive market action of the last two weeks, including investments by Abu Dhabi and Singapore in Citigroup and Washington Mutual, the Federal Government’s Mortgage Freeze Plan and the tolerable November Jobs Report, would seem to allow the Fed to show some inflation fighting credibility by just cutting 25 today.

If they do, and even if they give the market all the other bells and whistles it wants (50 basis point cut in the discount rate, policy bias towards cutting), it might not be enough given the ferocious upward move in the market over the last two weeks (S&P 1 Month Chart).

So, assuming the cut comes in as expected, the market reaction will be paramount.