One of the key members of the Fed admits that there is a great deal of debate within the body about cutting rates. Based on a speech by the Fed’s vice chairman Donald Kohn, Reuters points out that "hints at a split between policy-makers that critics find worrisome, because it raises doubts about how far the Fed will be prepared to cut interest rates to shield the economy from a slumping housing market, increasing the odds of a recession."
In other words, it is not clear whether concerns about inflation or recession will govern the actions by the Fed in the early parts of 2008.
If the Fed leans toward viewing inflation as the greater of two evils, the half point cut that Wall St. expects later in the month may end up being only a quarter point. No one can guess what that will do to the market, It would be hard to quarrel with the fact that it could push the Dow down 250 to 500 points, at least temporarily. Some sectors like housing and automotive could fall even further.
Debate at the Fed may have a modest effect on the economy, but it could be the undoing of the stock market.
Douglas A. McIntyre
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