Market watch: Predicting Fed’s moves is tricky at best
Significant swings in global equity, currency, commodity and fixed income markets are triggered around Fed actions, writes Udayan Mukherjee.india Updated: Nov 30, 2007 21:16 IST
An US Fed meeting is coming up on the 11th of December and the familiar drama has begun: of trying to guess whether the Fed will cut rates again or not. The Fed futures are reflecting a 90 per cent probability of a 25 basis point cut and a 26 per cent probability of even a 50 bps cut. This speculation will reach feverish pitch in the next ten days and all sorts of opinion will be put forward on whether the Fed will cut or not and if it does, how much. In fact, trying to predict the Fed's moves has become a global obsession. Significant swings in global equity, currency, commodity and fixed income markets are triggered around Fed actions.
The Fed adds to this drama with its constant doublespeak. Sometimes it worries about growth and sometimes about inflation. It says it is always "data dependent". The simple truth is that the Fed cares about one thing: Wall Street. To the Fed, Wall Street is the final melting pot of all things economic and it generally does what the financial market expects it to. So, if the market seems worried and sells off then chances are that the Fed will cut rates to revive it, if the market is buoyant the Fed concludes it doesn't need a crutch and conserves its firepower. To cut a long story short: the US economy is a dangerously sick animal and the US Fed is the ultimate bailout doctor, ever so happy to prescribe any drug to keep the beast going. Beyond a point, it's quite superfluous to try and second guess the Fed; that time is better spent in observing what the market needs and wants, therein lies the answer. In that sense, the US Fed and the RBI are probably exact opposites.
My own sense is that the Fed has embarked on a long rate cutting cycle. The US economic data isn't exactly painting a bullish picture and the credit market situation isn't too good. Over a period of time this only points in one direction: more rate cuts. Now whether the Fed skips a meeting or two in between is, frankly, academic because cut it will have to. At best it may try to stagger the cuts as that's about the only bullet in its gun and who wants to run out of ammunition? Emerging markets need not worry, they will get enough of their beloved rate cuts in the next few months. The surprises, if any, will be positive. Aside of the obvious equity and commodity market rub-offs, at some point this will also start weighing on the mind of our own RBI, as rate differentials widen. And the contrarian dollar bulls and rupee bears better keep this in mind as well.
(The writer is the Executive Editor, CNBC-TV18)