Investors Need More Than a Rate Cut From the Fed

Posted by Louis Navellier on 10/28/08 9:12 am

Last Friday, Britain announced that it slipped into a recession in the third quarter.  And on Thursday this week, the U.S. will likely announce that it is headed for recession, too, when the government releases its preliminary estimate for third-quarter GDP.  Economists are predicting that the U.S. economy contracted by 0.5% in Q3.  However, before the GDP report gets released, the Federal Open Market Committee will most likely cut interest rates on Wednesday.  The futures market is predicting a 100% chance the Fed will cut the federal funds rate by 0.5% to 1%, primarily because Fed Chairman Ben Bernanke has signaled there will be an additional rate cut.  Furthermore, market rates, based on the 3-month Treasury bill, remain below 1% and the Fed rarely fights market rates.

As a result, the GDP report might not have much effect on the market since a -0.5% reading is likely already priced in.  But if the reading is worse than expected, we could see more weakness in stocks.  That’s why we need some encouraging words from the Fed to go with a rate cut on Wednesday.

The Fed’s statement will be thoroughly scrutinized and it will help set the tone for the stock market in the days ahead.  If the Fed shows fear, the stock market will likely give back much of today’s gains, especially if the GDP report is worse than expected.  If the Fed gives us a silver lining, the stock market will likely extend today’s rally. 

Investors need a spark that will release the trillions of dollars sitting in cash on the sidelines and stop the massive erosion in stock prices.  Hopefully the Fed will step up to the plate tomorrow and cut interest rates by at least 0.50% and say something that gives investors hope.

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