The Fed's No-Win situation

It seems to me, no matter what the Fed decides to do tomorrow (lower short term rates by 0/25/50 bps), the stock market is bound to go lower.

Let say the Fed does nothing or only lowers the rate by 25 bps. Market participants will hammer the stockmarkets worldwide in response to what they view as an inadequate action by the Fed to rescue a clearly ailing US economy. The 'Greenspan put' (the idea that the Fed will come to the rescue of the economy at any time) will be laid to rest at last and the markets could be looking at a prolonged decline until the next catalyst appears.

If on the other hand, the Fed lowers the rate by 50 bps or more, markets will rally in the short term. But this will only be temporary. If the data driven Bernanke Fed decides to make such a drastic reduction in the overnight rate, then things must look bad indeed. If we go back to economics and the business cycle, when interest rates start declining, it is an indication of a top or a recession. Stocks do not go up until the later stages of a recession, and we are far from that point.

Remember, with crude trading near $80, inflationary pressures are still present. Also, the majority of ARMs do not reset until early 2008. There will be more pain before things look better.

-Jason