The Rally's Killed the Rate Cut

The Federal Open Market Committee meets today on the precipice of war after a nearly week-long rally that chilled chatter the central bank might ease again.

The rally isn't the only factor arguing against easing by the Fed. But the amount of recent speculation underscores that some still believe in the power of a Fed interest rate ease -- even after a bear market has shrugged off 12 of them.

The consensus view is that the Fed will hold rates steady, but possibly shift its "balance of risk" assessment to one tilted toward economic weakness. Fed funds futures are pricing in only slim odds of an ease this week, although the rising likelihood of another by summertime. While some are forecasting a rate cut on Tuesday, the majority of the 22 primary bond dealers expect no action, according to Reuters. Separately, more than 85% of economists polled by Bloomberg forecast no rate cut this week.

Other factors pointing to no rate cut at this week's meeting include repeated declarations by Fed officials that geopolitical risks are holding back what otherwise would be a robust economy.

Although economic growth has been "below trend pace," Alan Greenspan testified before Congress last month that "conditions were in place for the recovery to pick up," recalled Mickey Levy, chief economist at Banc of America Securities. "According to [the chairman], geopolitical risk continued to restrain the economy, but monetary policy was sufficiently accommodative and productivity growth robust that improvement likely lay ahead."

If the Fed were to ease now, Greenspan & Co. would not be able to put those theories to the test, as there'd be no time for the economy to react to a lifting of uncertainty about war. An easing would be "tantamount to admitting that deeper troubles ail the economy," commented Jes Black, currency analyst at MG Financial Group.