What will the Fed do?

All eyes will be on the US Federal Reserve for today's interest rate decision. Charles Stanley's Jeremy Batstone Carr considers the chances of a cut - and what it would mean for the markets.

The Federal Reserve meets on 18th September to decide on US base rates which currently stand at 5.25%. Given the backdrop to this meeting it is hard to overstate its significance. The financial futures markets are discounting 0.75% off base rates by end-2007 and we look for a full 1.0% reduction by end-Q2 2008. The last piece in the jigsaw is likely to be Retail Sales data for august due for release today (Friday 14th September).

After the awful payroll data expectations for an aggressive 0.5% point reduction in rates increased sharply, however, since then Dr Bernanke has given little away. A closely watched speech in Berlin said little about the health of the domestic economy but his comments on global economic imbalances were interpreted as dollar negative. US consumer confidence remained unchanged at -17 as consumers appeared indifferent to rising gasoline prices and falling employment. Slightly concerningly, the data also showed respondents' view of the economy actually improving slightly (-32 to -34) while the outlook for retail sales improved (-30 to -28). This may point to a slightly more robust retail sales number which is forecast at 0.5% (+0.2% ex automobile sales).

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