Waiting for Tuesday

Each Monday the Wall Street Journal provides a little day-by-day list of important events for the coming week: earnings announcements, economic data releases, etc. It is a nice feature that helps traders know what to expect. This week's version includes the usual minutiae, but might just as well have a single entry: "Tuesday, 2:15 Eastern Time, FOMC announcement."

FOMC stands for Federal Open Market Committee, the group which decides on the Federal Reserve's interest rate policy. Wall Street is certain this meeting will end with a rate cut and debates only whether it will be one-quarter of a percentage point or half a percentage point. Chairman Ben Bernanke and his colleagues are well aware that the market will not appreciate any surprises. Since they have not tried to signal any disagreement with the prevailing expectations, a rate cut of some degree seems very likely. More important will be the accompanying statement that may provide clues to future Fed policy.

Reaction to whatever the Fed does is difficult to predict. Indeed, with such widespread consensus it seems almost certain that the impact of a rate cut is already baked into asset values. It is hard to imagine anything the Fed could say or do that would create a bullish reaction for stocks - but Bernanke may have tricks up his sleeve we don't yet know about. The recent rise in commodity prices, especially oil and gold, and a concurrent decline in the dollar and yen are almost certainly related to the impending Fed action.

Across the Atlantic, a bank in the UK called Northern Rock is experiencing an old-fashioned bank run. The Bank of England bailed out Northern Rock last week, but customers are are still lining up (or "queuing" as the British like to say) to withdraw their deposits - to the tune of about $4 billion so far. This is minor in the grand scheme of things, but a troubling reminder of how some institutions may be close to the edge.

As a measure of how fixated the markets are on tomorrow's decision, consider that today's NYSE volume was the lowest for a full trading day so far this year. Clearly investors are in wait-and-see mode, and wisely so. Stay tuned for an interesting week.