Potential Outcomes of Fed Meeting

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."

What's been said:

Discussions found on the web:
  1. ss commented on Aug 8

    When you quote Brian Reynolds……
    You Get My Attention!

    So he is predicting what?

    I agree with your prediction, but I think the correct choice should be #1.

  2. Metroplexual commented on Aug 8

    I think Ben is tightening and saying wait and see. Too many signs that inflation is alive and well. Better to tank the economy than promote inflation. Besides what has happened to the strong dollar policy? If they dont raise the Euro will only get more pricey.

  3. John commented on Aug 8

    I think “Brian” in your article is Dead Wrong about any pause not being priced in. I think a pause is fully priced in, or by now, it should have been. I think the Market is still trying to develop a ‘feel’ for the Bernanke Fed. I think it was Alaskan Pete that said it best a couple of posts back– Analysts and market commentators still seem to be touting that capital spending and good earnings will take over for the pull back in housing mew’s and keep pushing the market and economy forward. I dont think so, either. These are lagging indicators. The Fed still seems to be increasing the money supply at the same pace. With this I don’t see how this Fed is serious about fighting Inflation. The yields on the 2,10 and 30 year’s have now pulled back below the fed funds rate. How many times has that happened in the past? It certainly doesn’t seem that the bond market is helping the fed in controlling Inflation.. or defending the USD.

  4. drey commented on Aug 8

    Are they really expecting #1, or simply hoping for it? I can see a pause but I don’t see it in conjunction with strong language about rate action going forward…why would they paint themselves into a corner when more inflation is in the pipeline?

    And if many are expecting #1 as you suggest, wouldn’t this indicate that a pause IS somewhat priced into the market, contrary to what Brian says in the last line of the post?

  5. Lyon commented on Aug 8

    I predict #2.

  6. Josh commented on Aug 8

    I don’t see why they would commit themselves to stopping in the near future. They will say wait and see. As for a pause now or an increase, who knows.

    2 and 4 are most likely.

  7. Alaskan Pete commented on Aug 8

    They will go #2 (an appropriate double entendre!)

  8. Lord commented on Aug 8

    I think #2 is most likely. Second most is not #3 but

    25bp tightening and language that says they be prepared to loose if weakening becomes too pronounced;

  9. Royce commented on Aug 8

    #2. The market will go up 2% today, and give it all back over the next couple of days. That’s what I’m going with.

  10. Alaskan Pete commented on Aug 8

    Weird. Many posts are showing zero comments like so:
    ” Comments (0)”

    on the front page but have comments. I’ve had issue like that on some blogs before (seems like they were all Blogger rather than Typepad though).

    Anyway, just a heads up Barry. I doubt it’s on my end, I refreshed after clearing my cache to test and it still shows zero. I’m running std software on this machine (Win XP, Explorer).

  11. fred hooper commented on Aug 8

    I choose door #4, just because everyone hopes for #1 or #2. Actually, they should go with the medicine #4, but I like the case for money fix #1, Inflate or Die:
    Of course, they could go with #3, with a stern warning that unless the markets behave, another dose of #4 will be forthcoming.

  12. Craig H commented on Aug 8

    #2, nothing but lip service on rising inflation and the slowing economy.

  13. JDamon commented on Aug 8

    No chance for #1, no way, no how.

    I vote #2 as well, however I think the Fed pause is basically built into the market. We may see a small gain DJ up 50, NAZ up 10 and S&P up 7 on a pause with wording saying they will continue to closely monitor signs of inflation.

    If they tighten (either 3 or 4) markets will crash, absolutely crash. I will then know BB is even dumber than Greenspan was.

    This market really, really wants to go down IMO, but since I am 90% long, it’s not what I want to see.

  14. jim commented on Aug 8

    Bernanke decided to kiss ass. What a loser.

  15. Josh commented on Aug 8

    #2 it is.

  16. JDamon commented on Aug 8

    Right decision. Good job BB, looks like you might be a HUGE improvement over the goon that was there before you. Corporate profits are going to surprise over the next couple of quarters. I guarantee it. This market is heading higher in both the short and long-term. Look at P/E ratios folks. They are way, way below where they should be. Too much bad news already priced in here. While I respect Barry, the housing situation is NOT what will derail the economy. People will just stay in there homes and put more on the good ole Mastercard/Visa. Its the American way!

  17. Craig H commented on Aug 8

    The interesting thing about this is that the decision wasn’t unanimous, with Lacker voting for 1/4 point hike.

    Ben doesn’t have all his ducks in a row.

  18. ss commented on Aug 8

    Agree Johnnie Damon!

    Out of the park!

  19. Craig H commented on Aug 8


    You guarantee it? At what bank are you posting the surety bond that will cover our losses?

  20. jkw commented on Aug 8

    I was expecting the reaction rally to last longer than that. It didn’t even make it 5 minutes before the selloff started. I should’ve put in some closer orders. At least I had some puts ready in advance so it’s not a totally lost opportunity.

  21. drey commented on Aug 8

    stick to baseball, JDamon – you ain’t gonna make it as a market prognosticator though you might get invited to appear on Kudlow and Co.

  22. IT commented on Aug 8

    2) No tightening and language that indicates wait and see

    Barry, this is exactly what we got from the fed today. What are you talking about?

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