Fed Funds Futures Price in 50Bp Cut

By: •

As the U.S. Congress voted to reject the bailout legislation, Fed Funds Futures are pricing in a 66% chance of a 50bp rate cut and 34% of a 75bp cut for the next Federal Reserve meeting scheduled for Oct. 29.

In a stunning turn of events that sparked a landslide sell-off in equity markets, the U.S. House of Representatives rejected the Emergency Economic Stabilization Act in a final vote of 228 to 205. Meanwhile, Congressional staffers reportedly said a second vote on the bill would not be held until Thursday at the earliest.

As a result of the failure of the bailout package, economists from RBC Capital Markets are now expecting a rate cut.

"With the bailout package failing, quarter-end and year-end approaching and central bank operational alternatives stretched, the probability of an emergency rate cut has increased from 'somewhat possible' to a very real chance," they wrote.

Markets are now pricing in a 54.8% chance of a 50bp cut for the year-end meeting scheduled for Dec. 16, up from the previous 41.8% expectation a day ago. The implied probability for a 75bp rate cut has grown to 23% from 8.7% while the chance of a 25bp cut has declined to 22.2% from 49.5% a day ago.

George Androulakis, director of foreign exchange at the National Bank of Canada, now expects the Fed to step in.

"What comes next is anyone's guess, but in an effort to appease markets somewhat, US Treasury secretary Henry Paulson vowed to use all means possible to protect financial markets. The possibility of an emergency rate cut is certainly possible, and may be done in a coordinated effort with other central banks," Androulakis said.

Looking ahead to the meeting scheduled for Jan. 28, 2009, markets are now pricing in a 51.4% chance that the Fed will cut rates by 50 bps. This is a sharp increase from yesterday's 38.1% expectation and the 6.4% chance from a week ago. Markets are also pricing in a 25.7% chance that the Fed will cut rates by 25 bps and a 20.5% chance of a 50bp cut.

By Steve Stecyk and edited by Nancy Girgis
©CEP News Ltd. 2008