Wednesday, January 23, 2008

Will the Fed cut by another half-point or more?

At this moment, February fed funds futures are priced at 97.1100 which corresponds to an implied target rate of 2.8900%, which implies a 100% chance of the Fed cutting the target rate by another 50 basis points by the end of the month and a 44% chance of a 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 cut by another half-point at the FOMC meeting next week.

Although the market is also saying that there is a slightly less than coin-flip chance that the Fed will give us a 0.75% cut by the end of the month rther than just a 0.50% cut, this could be more of a speculative bet or insurance hedge by various market participants. I wouldn't say this extra cut is baked into the cake until the chance goes above 66% (2 out of 3.)

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

-- Jack Krupansky

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