Transcripts

The Fed Watch is On

SUSIE GHARIB: The Federal Reserve kicked off its two-day policy setting meeting in Washington today. The central bank is widely expected to trim rates a quarter of a percentage point tomorrow for its second rate cut this year. Erika Miller has details on whether the Fed will give investors the rate cut they're counting on.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Financial

markets are counting on a rate cut by the Federal Reserve tomorrow afternoon. If that does not happen, economist Drew Matus warns there will likely be a big sell-off in stocks.

DREW MATUS, SR. MARKET ECONOMIST, LEHMAN BROTHERS: The market is pricing in 25 basis points. So, if the Fed doesn't give it to them, they're going to have to worry a little more about growth and that's probably bad for stocks.

MILLER: A quarter-point cut would bring the Federal funds rate to 4.5 percent. It would follow a surprising half-point drop in September. Economist Mike Feroli says a move tomorrow is needed to guard against recession.

MICHAEL FEROLI, ECONOMIST, JP MORGAN: Even though the Fed and most analysts I think, have been expecting housing to be very weak, it has probably been even weaker than they or certainly we have expected. So, I think that could contribute to some fears about downside risks here.

MILLER: In addition, economists worry the could deepen, making it harder for consumers and businesses to borrow money. Most Fed watchers believe a more aggressive half-point cut is unlikely because it risks suggesting the economy is in serious trouble. Some economists do not expect the Fed to make any move at all, arguing the economy is on solid footing outside of housing. Also up for debate are the changes the Fed will make to the statement accompanying the decision. The Fed is widely expected to give itself maximum flexibility for future moves. Many economists also think policy makers will make a special point to emphasize their focus on the economy.

MATUS: I would look for them to try and move away from any statements related to the current health of financial markets and to talk much more about what we're seeing in terms of the growth outlook going forward.

MILLER: It's not the Fed's mandate to mind the markets, but plenty of economists think the Fed will cut rates tomorrow partly to avoid a nasty reaction on Wall Street. Erika Miller, NIGHTLY BUSINESS REPORT, New York.