Fed Funds Futures Price in 17.5% Chance of a Rate Cut for Year-End

Fed Funds Futures are currently pricing in a 17.5% chance of a 25 bps rate cut for the year-end Federal Reserve meeting scheduled for Dec. 16, as markets are focused on earnings results from Lehman brothers and a larger-than- expected draw on crude and gasoline inventories.

Lehman Brothers pre-announced earnings on Wednesday and reported a larger-than-expected $5.92 loss per share. The street had been looking for a $3.45 loss. The investment bank also cut dividends from 68 cents per share to 5 cents per share, taking a mark-to-market writedown of $7.8 billion. The move came following Tuesday's announcement that talks to sell Lehman's Newburger Burman asset management division to the Korean Development Bank ended without conclusion.

For the Oct. 29 meeting, markets are now pricing in a 7.7% chance that the Federal Reserve will cut the fed funds rate by 25 basis points. This is an increase from yesterday's 5.8% result.

U.S. crude and gasoline supplies declined far more than expected after Hurricane Gustav, according to data released Wednesday from the Energy Information Administration (EIA). U.S. crude oil stockpiles decreased by 5828k barrels in the week ending Sept. 5, while gasoline supply fell 6462k. Crude oil inventories were expected to decrease 3500k, according to Bloomberg. Gasoline inventories were forecast to decline 4500k barrels.

Looking ahead to the upcoming meeting scheduled for Sept. 16, the implied probability for a rate hold is at 96%, although markets have now begun to price in a 4% chance of a 25 bps cut.

By Steve Stecyk and edited by Sarah Sussman
©CEP News Ltd. 2008