Moderate decline in chance for a half-point Fed rate cut

At this moment, February fed funds futures are priced at 96.9250 which corresponds to an implied fed funds target rate of 3.0750%, which implies a 100% chance of the Federal Reserve cutting the target rate by at least a quarter-point by the end of the month and a 70% chance of an additional quarter-point cut on top of that. In other words, a half-point cut is still likely, but no longer with as much "absolute" certainty as yesterday.

The increased skepticism about a half-point cut probably came as a result of the stronger-than expected durable goods orders report for December. People may be a bit less inclined to believe that a recession is a "slam-dunk", but they would like to see the extra Fed insurance nonetheless.

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 cut by a half-point at the FOMC meeting next week.

Please note that all of this is subject to change, literally at a moment's notice.

Update at 8:46 p.m. PT: Just in case you thought I was kidding about that caveat, now the February contract is priced at 96.9100, indicating a rate of 3.0900 which indicates only a 64% chance of a half-point Fed rate cut. I use 66% (2/3) as the breakpoint for indicating that an outcome is solidly more likely than not. So, technically a half-point cut is still likely, but not so likely as to be a reliably credible "bet." People are having some serious second thoughts even though they still feel than the Fed will probably go for more insurance than less.

Once again, I have to caution that all of this is seriously subject to chance at a moment's notice.

Oops! It changed again (really!)... the chance is now 68%, so... never mind! Aarrgghh!

My personal view at this stage is that there is enough rampant anxiety about the economy and outlook and the fiscal stimulus is still far enough down the road that the Fed is much more likely to go ahead with the "expected" half-point cut simply as "insurance", with the full knowledge that they could well reverse that cut within a month or two if the anxiety substantially dissipates in the face of economic improvement. In particular, the durable goods order report is just one additional data point and the Fed would almost never base a decision on one data point. Besides, I strongly suspect that the Fed decision was probably baked in the cake by the time the Fed officials went to bed Monday evening.

-- Jack Krupansky