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Investors are eagerly awaiting the next rate announcement following the next Federal Reserve meeting on Tuesday, 18 September, so they can gauge the level of risk they wish to take going forward.

It has been widely reported that investors expect a cut in the Federal Funds Rate, which drives the rates at which banks lend to each other and a team of market analysts at have broken down the possible outcomes as follows:

Scenario A: The Fed leaves rates unchanged.

Ryan Kneale, market analyst at BetsForTraders said: "Under this scenario, we would expect the equity markets to fall, as many traders are long under the presumption that rates will be lowered and therefore liquidity in the credit markets will improve. A sell off in stocks is to be expected in this instance with bank stocks taking the brunt of the hit. We expect the more rate-sensitive banks on both sides of the Atlantic to react badly. The US dollar will almost certainly strengthen as many traders have already sold out of it recently, pushing the higher yielding currencies down from their recent highs against the greenback."

Scenario B: The Fed cuts the rate by 25 basis points.

Ryan added: "The equity markets will gain moderately as an increase in liquidity in the credit markets will be enjoyed by banks, much in line with expectation. As the Fed Fund Futures are already pricing in a 25 basis point cut for September, we would expect a short-term rally in equities, as traders breathe a sigh of proverbial relief. The US dollar may even gain some ground against the higher yielding currencies under this scenario, as many traders are positioned to benefit from a full 50 basis point cut. We expect some moderate dollar strength over the following days as these trades are unwound."

Scenario C: The Fed cuts rates by 50 basis points.

Ryan continued: "The Fed Funds Futures are currently pricing in a 50 basis point rate cut at around a 65 per cent probability, while the action on the foreign exchange book at has the event implied at about a 71 per cent probability, according to our models. The jury is therefore very much out on this one and there is still room for equities to gain significant strength in the event that the full 50 bps is delivered. Liquidity in the credit markets should increase considerably under this scenario and we can expect the recently battered bank stocks to lead the way up in much the same way as we can expect the opposite effect in the event of an unchanged policy. The US dollar will no doubt come under further pressure and we would expect to see the dollar lose ground against all of the majors, as the difference in currency yields widens. Some of the more aggressive traders at who are expecting a 50 bps cut are now betting on sterling/dollar to make it as far as 2.070 in the next 10 days.

"This commentary provides a fairly simplistic short-term view, but it is a big decision for the Federal Reserve and the world will be watching to see how they call it. Whichever they elect to do will have substantial ramifications for the economy at this delicate time.

"Taking a longer-term view, the Federal Funds Rate has long been used to control inflationary pressures in the US and has been a key driver in foreign exchange rates. To cut rates to buoy the world’s financial markets is a good short-term option, but it could well come back to haunt the Fed. Lowering interest rates may cause a weak dollar, which would have obvious consequences for import prices. This in turn can be expected to adversely impact upon shelf prices for the US consumers, thus driving US inflation up. The added risk in the equation is that consumer interest rates will decrease. American households certainly don't need any more access to credit, given the prevailing deficit.

"So, we await the next Federal Reserve meeting. A cut in the Federal Funds Rate may be just what the markets ordered to restore a sense of calm in the short-term, after the recent frenetic trading. Looking to the not so distant future though, is it really the answer or is it a case of papering over the cracks? If a major bank announces they are in trouble with sub-prime mortgage lending, investors will be out of the markets like a shot. The real problem behind all this is debt and the fact that there is too much of it. Playing with interest rates may increase and decrease liquidity, but lowering them allows more borrowing and raising them causes more defaults on the payment of debt. So, is lowering interest rates when debt is the root cause really the way out of this? Inevitably the markets will decide."


Media Enquiries:
Justyna Gnyp, hblmedia, 0207 612 1830,

Notes to Editors:


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