Fed Meets Today - Does Size Really Matter?

March 20 -- The Fed is going to slash interest rates today, but by how much is up in the air. There's a clear case to be made for the Fed to cut the, currently 5.5 percent, by 50 basis points, and a strong argument also to be made for cutting the funds rate by 75 basis points.

Nobody really knows what's going to happen. Right now, a total of 12 of 25 economists, as polled by Reuters, are betting that the Federal Reserve will ease policy by 50 basis points today

Even the fed funds futures contract betrays confusion. Odds, as measured by the April contract, already show 50 basis points in the bag, but it's also currently pricing in a 65 percent chance of a 75-basis-point cut. Such a move by the Fed, all at once, would be unprecedented.

The Case for 50

Those looking for a 50-point move had no trouble fashioning an argument for a 75-point move.

What makes a 50-point move most likely are recent measures of consumer spending. Automobile sales have rebounded recently and retail sales, on average, have also been stronger than the markets had originally anticipated. In addition, the University of Michigan's Index of Consumer Sentiment actually rebounded slightly in March, an indication that the average consumer is still spending money and still feels reasonably comfortable about job prospects (although confidence has clearly fallen sharply since last year).

"With a big drop in consumer sentiment [Fed boss Alan Greenspan would] have the cover to go 75 basis points," said Bill Quan, economist at Aubrey G. Lanston, who believes the Fed will cut 50 basis points. "All the economic data we've had says consumer demand has been relatively decent in the first quarter, showing modest growth."

These various reports, along with the Fed's own assessment of the economy, suggest that Fed officials would be wary of cutting by 75 basis points all at once if the only reason appears to be the equity market. While stocks' recent performance has been dreadful, the Fed has taken great efforts to suggest that the stock market only dictates Fed policy in how it affects the consumers' mind-set.