It seems likely the Fed will lower rates on Wednesday, but will it cut by a quarter-point or half-point?
Mike Darda, MKM Partners Chief Economist joins the panel for this conversation. Following is a summary of his main points.
With the Fed firmly ensconced in risk management mode and home prices falling by virtually every measure, I think the FOMC will deliver a 50 bps cut on Wednesday, Darda says. I can’t imagine Bernnake making a smaller cut which could disappoint the markets; not with stocks unsure of their footing and the murky growth outlook.
The key questions going forward are
1) how low do short rates go
2) how fast does the Fed take back the rate cuts if it proves to have overshot?
I believe the Fed very well could be done with rate cuts after Wednesday, Darda adds, and personally, I don’t think the economy is nearly as weak as the pessimists would have us believe.
The Trade:
The Fed's action should be bullish for commodities, emerging markets and financials, Darda says. However, it could embed the risk of inflation long-term and that’s probably bearish for treasuries.
