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Published on April 29, 2008

Paisarn Lertkowit is vice president of Bangkok Bank's Treasury Division

No, it is not ET (Entertainment Tonight). It is the April 29-30 meeting of the US Federal Open Market Committee (FOMC), the body charged with setting the allimportant federal funds rate.

A month ago, it was beyond doubt the Fed would continue to cut its interest rate 2550 basis points, ultimately lowering the rate to 11.5 per cent by the end of the year. However, the story has changed. It is now more likely the Fed will cut its rate only 25 basis points from the present level of 2.25 per cent at this meeting and then hold it for a while.

Some even think the Fed may start to hike the rate 50 basis points in the first half of next year. Why has market expectations turned upside down? What has made the markets change their mind?

The markets have been flooded by bad news about the US economy, particularly the US financial sector, which has been posting huge losses and cutting sour assets day by day, sending the US dollar into a free fall against other currencies. But the bad news seems to have evaporated.

Following the huge writedown, the financial sector has begun to record betterthanexpected earnings and is possibly back on track, partly because of capital injections, allowing some to believe the worst is nearly over.

Moreover, in revaluating the economy's vigour, the Fed may have to take its toll by permitting price pressure to escalate. The situation is even worse, because rising oil and commodity prices are trying to achieve new records every day.

As well as there possibly being no more bad news, maybe the markets are starting to get used to it. As a result, our concern about the financial sector has begun to dissipate. The diminishing concern and growing confidence are injecting adrenaline into the mood of investors, tempting them to take more risks and buy back stocks and dollars.

In these circumstances, a dollar rebound would prevent other currencies - including the baht - from further strengthening and possibly stabilise the situation.

However, it may be too early to presume an end to the economic crisis. An extensively accommodating policy in which the Fed reserves action and lets the rate remain steady is a doubleedged sword. Such a move could lead to economic deterioration.

Tune in tonight for the latest episode and find out what comes next.