Fed Rate Cut: Most Of You Expect Half Point

You can feel the tension in the market as it seesaws in a fairly tight band ahead of the Fed's 2:15 p.m. statement.

It looks like Market Insider readers are siding with the majority Street view that the Fed will cut a half point. Forty-three percent of our readers see a half point rate cut. Of the 5000 who took the poll, another 34 percent expect a quarter point cut. There's 14 percent who expect NO cut. Another 8.6 percent see a second three-quarter point cut, and one reader wrote in saying he expects a full percent cut.

Tony Crescenzi of Miller, Tabak sent Market Insider this note yesterday , and I thought I'd share it with you for some pre-Fed reading:

" Fed Must Regain Control

What transparency?

The Federal Reserve's decision on interest rates is likely to be impacted Wednesday by the day's data on Q4 GDP and the ADP Employment Report for January. The market is currently priced for 76% odds of a 50 basis point cut, and these odds have been shifting each day, which is something that in an era of supposedly increased transparency at the Fed is a bad statement about the Fed's current level of transparency.

Convincing data could sway the Fed's decision in either direction. The Fed might also have the ISM index in hand, that is if the Fed decides to submit a special request to the Institute for Supply Management, as has been done in the past. The Fed will not have Friday's payroll figures in hand until Thursday at around 4 p.m. and only Ben Bernanke will have the data. Jobs data are not known to be passed along to others within the Fed, Fed officials assert.

I would rather see the Fed stay very fractionally behind the curve with its interest rate cuts in order to keep downward pressure on commodities prices and long-term rates. Moving too fast would rally commodity prices and cannibalize the benefits of the Fed's interest rate cuts and upcoming fiscal stimulus. Inflation played a major role in the weakening of the economy in 2007, with incomes cut sharply by rising prices of food and energy. If the Fed's actions push commodity prices higher, inflation expectations would rise and cause the recent decline in mortgage rates to be rather brief, squashing the nascent mortgage refi boom and also eliminating any chance at a rekindling of interest in home buying. Concerns about how a 25 basis point cut would impact equity markets is misplaced considering recent strides in the credit markets, which have been most pronounced in the money market (LIBOR, CP). Moreover, if cautious Fed actions keep a lid on inflation and keep mortgage rates low, equities benefit.

The Fed also needs to regain control over the timing and magnitude of its interest rate decisions, as the Fed missed opportunities to have its decisions appear timed to incoming data rather than to market events.

For example, the Fed could have cut rates in response to the January 4th jobs data but didn't. The cut that followed market events set a bad precedent. This can be reversed, however, with a reference in the statement to the cumulative cuts to date, as a means of pushing the markets back. The Fed will not close the door to future cuts, as there remain significant downside risks to growth. "

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