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Potential Outcomes of Fed Meeting

Posted By Barry Ritholtz On August 8, 2006 @ 11:28 am In Federal Reserve,Markets,Trading | Comments Disabled

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."

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