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Will WorldCom Woes Sway the Fed?

The Federal Open Market Committee, the policy-setting arm of the Federal Reserve, has resumed its 2-day meeting this morning, with the announcement expected around 2:15 p.m. EDT. While no change in rates or the bias is expected, it will be very interesting to see if the Fed subtly suggests an easier monetary stance, especially in light of the weakness on Wall Street sparked by the WorldCom revelations.

Indeed, with today's debacle in stocks, the market for Fed funds futures --a trading vehicle used by market pros to place bets on the future direction of interest rates -- is starting to price in an easing in rates. Fed funds futures prices are sharply higher, particularly deferred-month contracts, as the markets grapple with the latest bombshells from WorldCom and others. Though the near-month contracts, priced at 1.75%, are reflecting the market's expectation of no change in policy today, the August, September, and October contracts now reflect a fractional probability of an easing,trading in the 1.71% area, from the 1.78% to 1.84% yesterday.

While we at Standard & Poor's MMS don't expect the Fed to cut rates or even shift its bias toward easing, we suspect the Fed might suggest the volatility in the stock market adds risk to the recovery scenario. From Standard & Poor's MMS

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