Big Fed rate cut may spur a rally
NEW YORK (Reuters) - A big interest-rate cut by the Federal Reserve next week, or at least a hint more cuts are coming, coupled with this week's subprime rescue plan could lift investor confidence and inspire a pre-Christmas rally.
While most investors are banking on a cut of at least a quarter percentage point in the benchmark fed funds rate, many think a deeper reduction is needed to unfreeze credit markets and boost confidence.
On Thursday, President George W. Bush announced a plan to stem U.S. home foreclosures, sending stocks surging on optimism it would keep the economy from sliding into a recession.
"The big focus next week is the Fed meeting," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
He said that while the market was pricing in an interest- rate cut, there was still speculation about how big such a cut would be and whether the Fed also would cut the discount rate.
"Also if the comments reflect an easing bias, then together with positive momentum on the subprime plan, that should give a good support to equities," he said.
Encouraging data this week, including a resilient payrolls report on Friday, eased some concerns about the economy, decreasing the likelihood of an aggressive 50-basis-point cut in the fed funds rate.
Based on December fed fund futures, the likelihood of a 50- basis-point rate cut stood at 41 percent at midday on Friday, down from 65 percent a week earlier.
The fed funds rate for overnight bank loans now stands at 4.50 percent, following two back-to-back rate cuts -- 25 basis points on October 31 and 50 basis points on September 18.
The discount rate, which is the rate the Fed charges banks for emergency loans, now stands at 5.00 percent, following a 25-basis-point cut on October 31.
For the week, stocks gained, with the blue-chip Dow Jones industrial average .DJI up 1.9 percent, the broad Standard & Poor's 500 Index .SPX up 1.6 percent and the Nasdaq Composite Index .IXIC up 1.7 percent.
And with just a few more weeks left in the year, the Dow is up 9.3 percent so far in 2007. The S&P 500 is up 6.9 percent for the year to date, and the Nasdaq is up 12 percent.
ZEROING IN ON INFLATION
While investors are primarily focusing on a potential rate cut on Tuesday, they will also be closely watching inflation data later in the week.
The Labor Department will release its Producer Price Index for November on Thursday, and the Consumer Price Index is due on Friday. The consensus forecast is for an increase of 1.5 percent in overall PPI and a 0.2 percent gain in core PPI, which factors out volatile food and energy prices. Continued...
