Friday, February 29, 2008

Federal Reserve could cut by 0.75%

People are gloomy enough about the economy so that many market participants are betting that the Federal Reserve will cut its fed funds target rate by 0.75% at the March 18, 2008 FOMC meeting, if not before.

The April fed funds futures contract is priced at $97.6700, indicating a target rate of 2.33%, or a cut of 0.67%. That indicates a 100% chance of at least a 0.50% cut and a 68% chance of a 0.75% cut.

By my way of thinking even 68% is still not a "slam-dunk" certainty of a 0.75% rate cut. If the economy deteriorates further, yes the 0.75% cut will become a slam dunk. But... if the economy holds steady or even improves marginally over the next three weeks, all bets are off, even for the 0.50% cut.

On a positive note, weekly chain store sales actually rose last week, as reported on Tuesday. That is not enough to establish a clear trend, but certainly indicates that the economy is not completely gloomy.

-- Jack Krupansky

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