What If The Fed Only Cuts Half A Point?

"If wishes were horses, all the beggars would ride."

The market expects the Fed to take rates down .75% this week. According to MarketWatch "After the Bear Stearns news, market bets that the central bank will cut interest rates by 75 basis points next Tuesday jumped, pricing in a 100% chance of such as move, compared with 88% previously. The market also sees over 50% odds of an additional 25 basis points — which would bring short-term interest rates to 2% from the current 3%."

But, the tooth fairy left Wall St. last summer and is not likely to be back this year.

The Fed has a number of reasons to cut rates only .5%. Anything less than that would send markets down hundreds of points. But, governors of the agency still speak individually about concerns over inflation.

The inflation card has not been entirely trumped by other, equally valid concerns about the economy. But, the body of evidence that prices could spike up in the late part of this quarter is growing. Oil is at $110 and the effects of that are likely to hit gas and other petroleum products in the next several months. Wheat prices are now up three-fold in ten months. The price of food is going to be troublesome.

Metal commodities prices are also rising. Operations like car companies are seeing rising costs of goods which they cannot pass on to their customers.

If the Fed only cuts .5%, the markets are indeed likely to shudder. It still may be the best thing for all concerned.

Douglas A. McIntyre