We are sick and tired of speculating what Benny and the Inkjets will decide tomorrow. The truth is nobody knows, probably not even Benny (unlike that other guy who got a haircut at the Marriner Eccles building today and who speaks in tongues). So here is a quick and dirty cheat sheet from SocGen giving the probability to each of the six possible options that the FOMC can pick out of Bernanke's magic hat. With over four hours from open until the "Rien ne Vas Plus" is called, compulsive gamblers should be able to put some good money down on the trifecta.
(1) Operation Twist (duration extension): mostly priced in - impact minimal,
(2) Cut interest on excess reserves (IOER currently at 0.25%): possible, but no surprise factor and could backfire (negative impact on domestic banks, money market funds, reduces GSE incentive to lend to banks),
(3) QE3: market upping probability of QE3, but still likely positive impact,
(4) Pledge to keep balance sheet unchanged for a long time. Medium probability - a much cheaper option for the Fed than QE3,
(5) Setting explicit inflation/employment targets: low probability - Fed moving to increased transparency, however can’t see Fed giving up discretionary mandate just yet,
(6) Setting explicit GDP targets: a very bold move, much more inflationary - very low probability. The most likely scenario is Twist + some combination of 2 & 4, with the markets rallying initially whilst debating the real impact and sellers try to fade the move (starting around SPX 1250). If we do get QE3 then clearly 1300 becomes a more attainable target.