Ask economists and bond traders what kind of action the
is going to take tomorrow, and you'll probably keep getting the same answer: It's going to drop the target rate a half-point to 4%.
Ask people working in the equity arena, however, and the replies won't be so uniform. While the economists at all but one of the 25 primary dealers are forecasting a 50-basis-point cut, and the futures market is fully discounting a fed funds rate at 4%, the idea that the Fed could cut by just a quarter-point has lately crept its way into the stock market.
"There's definitely a big debate going on over which we're going to get," says
head of listed trading Todd Clark. "That's why we've seen the market lose a lot of momentum at the end of last week and today."
"There's some guys who are even betting there will be nothing," adds Jim Volk, co-director of institutional trading at
The idea of the Fed going less than a half-point isn't totally unfounded. Last Thursday, a number of retailers
reported April sales that handily beat analysts' expectations. Friday, the government's report on April sales saw a rebound, and there was also an unexpected improvement in the
University of Michigan's
consumer sentiment index. Many investors also see the recent rebound in stocks as an indication in itself that the economy has found its feet. While that may be a dubious claim, it is true that the Fed does not need to worry as much about the market as in March, when stocks seemed to be in free fall.
That said, the Fed doing anything other than cutting by 50 basis points is unlikely. Not amazingly unlikely, like the Red Sox winning the World Series, but pretty unlikely, like snow in June. The labor market is slipping, making the threat of consumer retrenchment very real. Today's report on industrial production shows that manufacturing remains very weak, and that augurs poorly for capital spending in the months to come. Although most economists reckon we will skirt recession, the Fed doesn't want to take any chances.
As a result, the stock market could be set for a move higher around 2:15 p.m. ET tomorrow, when the Fed's decision is due to come out. Most investors won't be shocked by a half-point cut, but there's a big enough minority out there that we could be in for a surprise rally when the unsurprising news comes out.