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Waiting for the Fed’s Next Move

03/06/2008 12:00 am EST


Mark Leibovit

Chief Market Strategist,

Mark Leibovit, editor of, says there's lots of speculation about what the Federal Reserve will do at its next meeting, and he lays out some scenarios.

The next [Federal Open Market Committee] meeting is on March 18th, and we can only wonder whether an intra-day meeting emergency rate cut will come or whether [chairman Ben] Bernanke will keep us hanging in anticipation.

Meanwhile, fed funds futures are currently pricing in an 80% probability the FOMC will cut the fed funds rate 75 basis points to 2.25% when it meets March 18. On Monday, the markets were pricing in a 74% probability that the fed funds rate would be trimmed to 2.25%. Some awfully smart people think we're ultimately going to see 1.75% in the federal funds rate. Whether that will make any difference short-term is yet to be seen.

One bullish view points to the fact that the 90-day T-bill hit its low yield since 2003 as the Fed floods the market with liquidity and investors run to safety. Long bonds were actually down as the yield curve steepened significantly. The [more than two-percentage-point] spread between the ten-year rate and 90-day rate is the largest in over three years. Generally speaking, a steep yield curve and low interest rates are bullish.

Short-term rates continue to fall, down to 1.43%. So the yield curve is steepening yet again while stocks fall. Same story we've had for the last few weeks. Eventually, this contrast will resolve itself and either stocks will rise or long bonds will fall. Or maybe this time really is different.

There is no question that the Fed is "juicing" this market and that they are preparing a rally. Now they just need a catalyst, which may be the March 18th rate cut. Or maybe even a surprise rate cut. We are getting close to a bottom. We could drop and retest the lows first. We could even break those lows, though I now doubt that will happen. The Fed has stockpiled its ammunition and loaded its guns. I know whose side I want to be on when the shooting starts.

Are the speculators correct that the Fed will cut 75 basis points? Or will the Fed cut 75 basis points because the market demands it? Can the Fed wait two weeks when every day we get more bad economic news and another fall in the stock market? Most importantly, does the fed funds rate even matter? In the interim, I remain on a Timer Digest Sell signal, as I feel there is "quicksand all around us."

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