Fed Interest Rate Cut Odds

I put a poll up, so readers please chime in - what will Big Ben do next week? The poll will close @ 2 PM on the 18th.

Now, while I don't think it matters much (changes take quarters to filter through our economy) other than psychology for investors - here is how I think the odds stand and the market reaction ....

No cut: 20% - Market reaction: SELL-OFF! Market is so pricing in this cut, if Big Ben doesn't follow along people will be aghast and say the Fed 'does not get it', 'is behind the curve', and 'won't give us our lollipop back'.

25 basis points: 75% - Most expect this although after last Friday's job report the knee jerk is to ask for more. Also, others say the Fed needs to look ahead need and cut 50 basis points. While in economic theory I somehow agree with that (although from moral hazard I do not), I don't see this Fed being that aggressive. Market reaction: Probably some mild spike in first 15 minutes until people realize investment banks report after 4 PM that day. Doh.

50 basis points: 5% - As we all know a 50 basis point cut would solve all world hunger, make the poor rich, stop global warming, and bring back the any species of flora or fauna on the endangered species list. Also it would create rainbows as a side effect. So Wall Streeters demand it. It must be. To not do so would be foolish. Alan would of cut by 75 basis points already in 3 intraday meetings - heck he might of done it all in 1 fell swoop the first time the market fell below the dreaded 4.4% mark from all time highs. You know, Dow 13,400! We cannot allow these travesty's to happen. Market reaction: 1000+ rise in 3 days as rainbows abound.... rainbows have been proven to solve all credit ills and unfreeze commercial paper operations. Source: my imagination.

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So we shall see how things play out. More interesting to me, will be the bias going forward and the corollary discount rate cut; if Fed funds are cut 25 basis points, won't the discount also be cut 25 basis points to keep this 50 point spread? Or will wily ole Ben, only cut 25 basis points on the Fed funds but 50 on the discount rate? Or maybe no Fed funds cut but 50 on the discount rate!?

Oh high drama ....

Most important, outside of the outlier event, what happens on September 19th? Does the whining begin in earnest for the next meeting, 6 weeks away? Oh gosh. Say it ain't so.