Thursday, January 24, 2008

Is a half-point cut still baked in the cake?

At this moment, February fed funds futures are priced at 96.930 which corresponds to an implied target rate of 3.0700%, which implies a 100% chance of the Fed cutting the target rate by a quarter-point by the end of the month and a 72% chance of an additional quarter-point cut on top of that.

Fed funds futures are typically fairly reliable within 45 days of an FOMC meeting.The net here is that "the market" is predicting that the Federal Reserve will still cut by another half-point at the FOMC meeting next week, but now a lot of people are having second thoughts as to whether the entire half-point cut is truly baked into the cake.

All of this is subject to change at a moment's notice.

The latest existing home sales report was negative, but not as terrible as it could have been. In fact home prices in some areas actually rose compared to November (and October) and the inventory of unsold homes shrank moderately for a second consecutive month. We are still not out of the woods, but this report did not make it feel as if we were getting deeper into trouble.

Weekly unemployment initial claims declined for a fourth week in a row. They are still elevated a bit compared to a year ago, but only modestly. This economic indicator is not signaling a recession.

-- Jack Krupansky

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