Amid stocks battered by credit concerns and disappointing durable-goods and new-home data the futures markets now are betting that the Federal Reserve will cut interest rates this year.
Trading in December fed funds contracts translates into the market giving 100% certainty that the Fed will cut rates to 5% by the Dec. 11 Fed meeting from the current 5.25% rate. That is up from about a 44% chance at Wednesday’s close. The market is pricing in roughly 50% odds that the FOMC could cut the rate as early as the September or October meetings.
Fed-funds futures are monthly contracts, measuring expectations for the 30-day average of overnight U.S. interest rates. Fed-funds contracts enable investors to hedge or speculate on Fed action at each of its eight scheduled policy meetings each year. Earlier in the year, the markets were putting a much higher likelihood on a Fed rate cut than Fed officials were, but the strength of the economy and Fed Chairman Ben Bernanke’s warnings about inflationary pressures changed the market’s mind — until now.
The Fed has left interest rates unchanged at 5.25% for over a year amid continued inflation concerns and moderate economic growth. Following congressional testimony last week by Bernanke, economists were generally in agreement that there would be no change rates for the foreseeable future. The Fed next is to meet to ponder interest rates on on August 7, with further meetings scheduled for Sept. 18 and Oct 30-31.
But, there is a million dollar questions are:
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