FOMC Meeting

Regarding the FOMC meeting, we expect a 25 basis points cut of the FF target rate, most likely accompanied by a bigger 50 basis points rate cut of the discount rate. The market has trimmed back its expectations for a 50 basis points cut, that were still rated more than even at the start of last week. Currently, the market discounts still a 30% chance on a 50 basis points rate cut. Two weeks ago, it looked that a clash between markets, desperately looking for lower rates, and the Fed hinting that no immediate rate cut was needed (October Minutes, talk of some governors like Plosser) was imminent. However, at that time, the top of the brass band (Kohn & Bernanke) stepped in, saying that financial conditions had worsened sharply since the previous meeting and hinting the Fed would act to contain the stress. It clearly improved sentiment (equities rebounded) and suggested to some in the markets that the Fed might go for a 50 basis points cut to get ahead of the curve (especially re-garding the credit problems). However, Bernanke, very much looking for a broad consensus, will probably try to build consensus for a 25 basis points in an attempt to keep most governors on board. This was the main reason we stick to our 25 basis points call. Recent eco data, payrolls-ISM, do not point either to the need for a big shot. Money market strains and difficulties at some big US banks on the other hand suggest that a bigger cut in the discount rate would be appropriate (even a 50 basis points cut in the FF would from this angle be not so silly). Also Kohn hinted that the previous cut of the discount rate had not had the expected result and so we might see the Fed making the discount window facility more attractive by narrowing the spread with the FF rate. If the Fed goes 25, we suspect that the statement will leave the possibility of more easing open, without going so far as to hint for another rate cut. With signs that credit