Brian Reynolds, Chief Market Strategist of M.S. Howells & Co., makes the following outcome based analysis:

We think there are four potential outcomes, based on a combination of Fed action and language. In order of what we think the initial stock price response will be today at 2:15 from the best to the worst, we think they are:

1) No tightening and language that says they are stopping;

2) No tightening and language that indicates wait and see;

3) 25bp tightening and language that says they are stopping;

4) 25bp tightening and language that says wait and see;

I think the most likely possibilities are #s 2 or 3; I usupect that many people are expecting #1.

The Fed funds futures have been all over the place: Last week, we were looking at a 40% chance of a hike; Yesterday, we were near 18%, and today, that has ticked up to 23%.

To quote Brian, "while this market is leaning heavily toward no tightening today, that is far from being fully priced in."

Category: Federal Reserve, Markets, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “Potential Outcomes of Fed Meeting”

  1. ss says:

    When you quote Brian Reynolds……
    You Get My Attention!

    So he is predicting what?

    I agree with your prediction, but I think the correct choice should be #1.

  2. Metroplexual says:

    I think Ben is tightening and saying wait and see. Too many signs that inflation is alive and well. Better to tank the economy than promote inflation. Besides what has happened to the strong dollar policy? If they dont raise the Euro will only get more pricey.

  3. John says:

    I think “Brian” in your article is Dead Wrong about any pause not being priced in. I think a pause is fully priced in, or by now, it should have been. I think the Market is still trying to develop a ‘feel’ for the Bernanke Fed. I think it was Alaskan Pete that said it best a couple of posts back– Analysts and market commentators still seem to be touting that capital spending and good earnings will take over for the pull back in housing mew’s and keep pushing the market and economy forward. I dont think so, either. These are lagging indicators. The Fed still seems to be increasing the money supply at the same pace. With this I don’t see how this Fed is serious about fighting Inflation. The yields on the 2,10 and 30 year’s have now pulled back below the fed funds rate. How many times has that happened in the past? It certainly doesn’t seem that the bond market is helping the fed in controlling Inflation.. or defending the USD.

  4. drey says:

    Are they really expecting #1, or simply hoping for it? I can see a pause but I don’t see it in conjunction with strong language about rate action going forward…why would they paint themselves into a corner when more inflation is in the pipeline?

    And if many are expecting #1 as you suggest, wouldn’t this indicate that a pause IS somewhat priced into the market, contrary to what Brian says in the last line of the post?

  5. Lyon says:

    I predict #2.

  6. Josh says:

    I don’t see why they would commit themselves to stopping in the near future. They will say wait and see. As for a pause now or an increase, who knows.

    2 and 4 are most likely.

  7. Alaskan Pete says:

    They will go #2 (an appropriate double entendre!)

  8. Lord says:

    I think #2 is most likely. Second most is not #3 but

    25bp tightening and language that says they be prepared to loose if weakening becomes too pronounced;

  9. Royce says:

    #2. The market will go up 2% today, and give it all back over the next couple of days. That’s what I’m going with.

  10. Alaskan Pete says:

    Weird. Many posts are showing zero comments like so:
    ” Comments (0)”

    on the front page but have comments. I’ve had issue like that on some blogs before (seems like they were all Blogger rather than Typepad though).

    Anyway, just a heads up Barry. I doubt it’s on my end, I refreshed after clearing my cache to test and it still shows zero. I’m running std software on this machine (Win XP, Explorer).

  11. M.Z. Forrest says:

    It is a typepad issue AP.

  12. fred hooper says:

    I choose door #4, just because everyone hopes for #1 or #2. Actually, they should go with the medicine #4, but I like the case for money fix #1, Inflate or Die:
    http://www.safehaven.com/article-5675.htm
    Of course, they could go with #3, with a stern warning that unless the markets behave, another dose of #4 will be forthcoming.

  13. Craig H says:

    #2, nothing but lip service on rising inflation and the slowing economy.

  14. JDamon says:

    No chance for #1, no way, no how.

    I vote #2 as well, however I think the Fed pause is basically built into the market. We may see a small gain DJ up 50, NAZ up 10 and S&P up 7 on a pause with wording saying they will continue to closely monitor signs of inflation.

    If they tighten (either 3 or 4) markets will crash, absolutely crash. I will then know BB is even dumber than Greenspan was.

    This market really, really wants to go down IMO, but since I am 90% long, it’s not what I want to see.

  15. jim says:

    Bernanke decided to kiss ass. What a loser.

  16. Josh says:

    #2 it is.

  17. JDamon says:

    Right decision. Good job BB, looks like you might be a HUGE improvement over the goon that was there before you. Corporate profits are going to surprise over the next couple of quarters. I guarantee it. This market is heading higher in both the short and long-term. Look at P/E ratios folks. They are way, way below where they should be. Too much bad news already priced in here. While I respect Barry, the housing situation is NOT what will derail the economy. People will just stay in there homes and put more on the good ole Mastercard/Visa. Its the American way!

  18. Craig H says:

    The interesting thing about this is that the decision wasn’t unanimous, with Lacker voting for 1/4 point hike.

    Ben doesn’t have all his ducks in a row.

  19. ss says:

    Agree Johnnie Damon!

    Out of the park!

  20. Craig H says:

    JDamon,

    You guarantee it? At what bank are you posting the surety bond that will cover our losses?

  21. jkw says:

    I was expecting the reaction rally to last longer than that. It didn’t even make it 5 minutes before the selloff started. I should’ve put in some closer orders. At least I had some puts ready in advance so it’s not a totally lost opportunity.

  22. drey says:

    stick to baseball, JDamon – you ain’t gonna make it as a market prognosticator though you might get invited to appear on Kudlow and Co.

  23. IT says:

    2) No tightening and language that indicates wait and see

    Barry, this is exactly what we got from the fed today. What are you talking about?