Fed Funds Futures Pricing in 100% Chance of Rate Cut Today

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Fed funds futures are now expecting a 100% chance that the Federal Reserve will cut rates at the FOMC meeting today; the question remains, however, by how much.

Markets are now factoring in a 76% chance of a 25 bps rate cut and a 24% chance of a 50 bps rate cut on a day that saw the U.S. consumer price index fall 0.1%, the first overall decline in over two years.

The decline in prices was led by a fall in energy prices by 3.1% in August, compared to a 27.2% year-over-year gain. Gas prices fell 4.2% in the month but have risen 35.6% in the year, and fuels & utilities fell 1.1% in the month but rose 15.3% on the year.

Paul Ferley, assistant chief economist at RBC Capital Markets, expects the Fed to cut rates by 50 bps.

"Inflationary risks are likely to take a backseat to the downside risks to growth that have emerged in recent days where financial market turmoil has ratcheted up the cost of capital once again," Ferley wrote in a note to clients. "In fact this deterioration has been so marked and rapid that we lean towards the Fed opting to cut Fed funds by 50 basis points to 1.50% at the conclusion of this afternoon's FOMC meeting to try and contain the downside risks to growth."

Ashraf Laidi, chief FX strategist at CMC Markets, also expects a 50 bps rate cut in the Fed funds rate to 1.50%, along with a similar 50 bps easing in the discount rate to 1.75%.

"Despite the $70 billion in overnight repurchase agreements pumped up by the Fed on Sunday night and the just announced $50 billion announced minutes ago, the U.S. central bank is facing a state of crisis in the financial markets from a perspective of solvency, liquidity and confidence," wrote Laidi.

For the meeting scheduled on October 29, markets are pricing in a 54.7% chance of a 25 bps rate cut and a 38.6% chance of a 50 bps cut.

Looking ahead to year-end, the implied probability is factoring in a 42.9% chance of a 50 bps cut and a 39.9% chance of a 25% bps cut. Fed funds futures have even begun to price in a 15.4% chance of a 75 bps cut for the year-end.

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