Federal Reserve 75bp Rate Cut Expectations Exceed Expectations for 50bp..Could it be True?!

January 17, 2008

Could it really be possible? Believe it or not the futures market is now pricing in a 58 percent chance of 75bp of easing at the end of the month up from 40 percent yesterday. In his Congressional Testimony, Bernanke repeated his prior warning that the Fed is “ready to take substantive additional action.” Up until today, this meant 50bp of easing because we expect the Federal Reserve to deliver exactly what the market prices in, nothing more, nothing less. Now that rate cut expectations are favoring 75bp of easing, we will be watching to see if those expectations grow. The financial markets have been extremely volatile and Fed fund futures are no different. I still believe that the US economy needs a 75bp rate cut, but it is just a matter of whether Bernanke will risk inflation to deliver it. If the Bush Administration announces a stimulus package, that too could lower rate cut expectations as tax cuts and additional spending reduces the need for more aggressive easing.

Posted in Bernanke, Fed Rate Cut, Fed Rate Cut Expectations, Federal Reserve