Fed Funds Price in 100% Chance of Rate Cut as Markets Rally

Fed funds futures have priced in a 100% chance of a rate cut for the next FOMC meeting scheduled for October 29, as markets rallied today on a CNBC report that the U.S. government has come up with a plan to deal with the financial crisis in the U.S.

Markets are now pricing in an 82% chance of a 25 bps cut and an 18% chance of a 50 bps rate cut for the next meeting.

The report on CNBC said Treasury Secretary Henry Paulson is considering the creation of an entity similar to the Resolution Trust Corp. that was set up during the savings and loan crisis of the late 1980s and early 1990s.

Larry Levin, president of Secrets of Traders.com said markets were extremely disappointed that the Fed held rates at 2.00% at the last FOMC meeting. He added, as markets trend lower, the only option will be for the Fed to cut rates.

"The Fed is now desperate/broke; the Treasury Department had to sell Treasuries (print dollars) to fund the Fed's balance sheet today," said Levin. "So confidence could be restored (slightly) by a surprise cut, which seems to be all that's left in the Fed's arsenal."

For the year-end meeting set for December 16, the implied probability for a 25 bps rate cut has increased to 69.6% from 46.1% a day ago. Markets are also pricing in a 15.9% chance of a 50 bps cut and a 14.5% chance of a hold.

Economists at Helaba do not expect the Fed to cut rates any time soon.

"We are skeptical and have the impression that the central bank would rather combat the turmoil in the financial markets with injections of liquidity than with more interest-rate cuts," they wrote in a research note. "But one thing is clear: the escalation of the crisis in the financial markets is having negative repercussions on the real economy."

Looking to the FOMC meeting scheduled for January 28, markets are factoring in a 63.5% chance that rates will be cut by 25 bps and a 20.8% chance of a rate hold.

All data taken at 4:35 p.m. EDT

By Steve Stecyk@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, ssussman@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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