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21.02.2008 - Fed minutes and cut expectations - market sure of another 50 bp cut

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Date: 2008-02-21 10:55

Cheaper credit will not solve all the underlying problems of the US economy (actually it may breed as many), but markets like low interest rates. Unsurprisingly then, they reacted with a lot of optimism to the latest Fed’s minutes confirming that a decisive action on the monetary front is needed – even if it will be soon reversed. At this moment, another 50 bp cut on the next meeting (March 18th) looks more than certain, leaving the target rate at a mere 2,5%. Consequently, stock markets moved up and the euro is fighting again to make it above November’s 1,4965 to the dollar.


One thing deserves a note, however. We had a similar situation in December when markets started to anticipate sharp cuts in interest rates. A mini stock rally proved short-lived when confronted with a dramatic data released in January. Also the euro, with all the support from the rates difference and macro economy, failed to conquer Novembers peak which prompted strong corrections favouring the dollar.


Przemysław Kwiecień
Chief Economist