Higher LIBOR Rates Boost Fed Rate Cut Expectations

November 29, 2007

The big story of the day is the sharp rise in LIBOR rates. This morning the LIBOR rate in Euros increased to the highest level in 6 years while the rate in dollars increased to the highest since September 17. This has caused central banks around the world to offer additional “emergency funding.” Even the Bank of England who didn’t inject any additonal funds in August pledged to add liquidity. Year end funding issues could keep the market tight. If we do not see the rates come down, central banks may be forced to take actions that they would have otherwise avoided given the current inflationary pressures.

According to the futures market, traders are pricing a 100% chance for a quarter point cut (0% chance for unchanged rates) AND a 22% chance for a 50bp cut. This represents a sharp change from a day ago. For Jan, there is a 80 percent chance of at least another quarter point rate cut. See the table below for more details:

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