Sunday, December 30, 2007

90% odds of Fed rate cut at end of January

Fed funds futures contract prices are now predicting a 90% chance that the Federal Reserve will cut rates by a quarter point at the next FOMC meeting at the end of January. A lot can and will happen in the next few weeks, but the economic outlook would need to improve substantially over the next few weeks to convince people, and the Fed, that another cut is not needed.

Personally, I do expect that the overall, non-housing economic data will show some amount of improvement over the next couple of weeks, but whether it will be enough to persuade market participants to raise their outlook remains to be seen.

Fed funds futures contract prices are usually a fairly accurate indicator of the target fed funds rate within 45 days in advance of an FOMC meeting.

The ISM Manufacturing and Non-Manufacturing reports and the December employment report due out this week, plus preliminary holiday retail sales reports, could seal the fate of the Fed for the January FOMC meeting.

The durable goods orders report last week was too weak and mixed to inspire any confidence in the economic outlook. On the other hand, the Chicago Purchasing Managers' Index rose fairly strongly last week. This mixed and uneven data is likely to lead to the Fed to give us an "insurance" cut unless the ISM and employment and other reports do in fact paint a picture of reasonably solid growth.

-- Jack Krupansky

2 Comments:

At 7:34 AM EST , Anonymous Anonymous said...

Why write something if its obviously wrong and you clearly don't understand it?
If you're interested in what the market is pricing..
Your head line should be..
2 and 1/2 to 1 odds that the FED will cut rates 50 bp's at the Jan meeting..
Thats what the market is pricing...
Heres a simple and easy way to keep track..
If the FED eases 25 in January.. FEB FED Funds the lead contract..
will trade 96.00 or 4.00%..
As they are close to 96.09...
that is around 30% probability of a 50 bp's move..

By the way odds are not quoted in percertage terms..
25% is 3:1 odds..

 
At 12:04 AM EST , Anonymous Anonymous said...

Oops... that should have been "chance" (or probability) rather than "odds".

Clearly I'm not a poker player and do not spend enough time in Las Vegas or at the racetrack.

90% was the correct probability at the time I posted, when the Feb contract was 95.975. Friday it closed at 96.1650 which suggests a 66% chance of a half-point cut.

-- Jack Krupansky

 

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