Fed Policy Pick'em [Update: 50 bps All Around]

Interest rate futures suggest Wall Street sees a 50% chance of a quarter-point cut (and a 50% chance of a half-point cut) to the Fed Funds Rate when the FOMC releases their policy statement shortly after 2:00 pm today.  Of course since at least a few must be expecting no move, that would actually suggest the market sees a slightly greater than 50% chance of the half-point cut, slightly less than a 50% chance of a quarter-point cut, and the remainder% chance of no move.

The Fed Funds Rate currently sits at 5.25%, right where's it been for nearly 15 months.  The Discount Rate (which had set to perfect lock-step with the Fed Funds for more than six years) was lowered a half-point (from 6.25% to 5.75%) in August in response to heightened credit crunch concerns.

One of the last relevant bits of data the committee will see before inking today's policy decision is this morning's wholesale inflation report, which showed prices in August plunging by 1.4% (compared to an expected decline of 0.3%).  That'll tend to give incremental cover to the Fed if they're aiming to cut rates, as Bernanke has continued to take a hawkish eye to an already relatively docile inflationary environment.

What's your prediction?  One reader will be randomly selected from the correct guesses submitted by 2 pm and will receive $150 in Suitably Flip PhunBucks.

I'll update with the Fed Language Watch once the statement is released.

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Update:  The poll is now closed.  If you said the Fed would cut both rates by a half-point (like 25% of poll respondents did), congratulations.

Not surprisingly, this first reduction in four years to the Fed Funds Rate is accompanied by far more drastic policy statement modifications that we usually see.

Press Release

Release Date: August 7,September 18, 2007
For immediate release

The Federal Open Market Committee decided today to keeplower its target for the federal funds rate at 5-1/450 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks,year, but the tightening of credit conditions have become tighter for some households and businesses, andhas the potential to intensify the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over comingand to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise quarters, supported by solid growth in employment and incomes and a robust global economy.from the disruptions in financial markets and to promote moderate growth over time. 

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. 

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin;Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh. 

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.

Wall Street is, in a word, psyched.
(Dow, S&P 500, Nasdaq)