Updated: November 6, 2008
.75 MOVING INTO PICTURE. Yesterday we talked about the difference between the November and January meeting outcomes. In November the probablities were favoring a cut to .5% while January was favoring staying at 1%. We thought this might be indicating short-term pessimism and longer-term optimism, especially with the end of the election. But yeseterday the Dow lost 500 points and it is down another 320 points as I write this. So, the futures markets are responding.
Looking at the charts below, the November and January probablities are starting to come together. For November a drop to .75% has now become the most likely probability followed by a cut to .5%. Lonter term optimism seems to be fading as the probability of staying at 1% in January is dropping while a cut to .75% or .5% is growing. At the moment, it looks like the market seems to be trying to come together around .75%. The Fed does not want to drop rates under 1% if necessary but if it has to will cut as little as possible. If economic conditions continue to worsen, then a cut to .5% is not out the question.
The Fed Funds Rate is a key indicator in determing the savings account rates, money markets rates, and CD rates that banks will pay. If the Fed funds rate goes down, banks usually lower their rates while the opposite is true if the Fed raises rates. While this is generally true we have not seen as strong a correlation lately. I analyzed rate changes over the last year and found that bank savings rates were much less sensitive to Fed Funds rate changes than would be expected. Up until now, rates on savings accounts and cds have held up relatively well but we've seen some significant drops in the last 48 hours. I'm going to provide more info on this shortly.
Comments
Sol Nasisi
May 14, 2008
80% probability according to this chart that the Fed will stay at 2% at the June meeting. Interesting that this probability has increased over the last week and a half from 70% to 80%. This is consistent with that we are seeing with savings and CD rates, which are no longer declining and are even rising in some cases.
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Sol Nasisi
May 15, 2008
I put up the new chart this morning and what struck me was the increased probability of the Fed Funds rate staying at 2%. Yesterday is was an 80% probability and one day later it has increased to 86-87%. There was also a correspondingly shart drop in the probability of the rate being reduced to 1.75%.
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Sol Nasisi
May 15, 2008
Slight increase today in probability of Fed staying with 2%. Almost 90% probability now. Also slight uptick in probability of drop to 1.5% although it's still below a 10% probability.
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Sol Nasisi
May 23, 2008
Nothing new happening. FOMC minutes did nothing to change probability of staying put on rates at the June meeting. If an increase is to happen it seems like it will happen later in the year.
It does seem though that barring any kind of major surprise, rate cuts are over.
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Sol Nasisi
May 28, 2008
90% chance of staying at 2% in June and 80% chance of staying at 2% in August.
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Sol Nasisi
May 31, 2008
There was a significant change today in the August meeting outcome. The probability of the Fed raising rates by 25 basis points at the August meeting increased from 10% to 20%. As a result, the probability of rates staying at 2% dropped from 76% to 70%.
A better than expected economy and rising inflation is setting the stage for the Fed to begin raising rates. Consider that before locking into any long term CD.
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Sol Nasisi
June 10, 2008
Big movement, especially for August meeting outcomes. The probability of a rate increase to 2.25% has spiked up to 40%. Inflation fears seem to be outweighing concerns of a soft economy. Still an 85% chance rates will stay at 2% in June.
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Sol Nasisi
June 13, 2008
For June, the probability of the Fed raising rates to 2.25% has gone from almost 0% several weeks ago to about 25% today.
Looking at August meeting outcomes, the probability of the Fed increasing rates by 50 basis points to 2.50% is now equal to a 25 basis point increase (2.25%).
It looks like the markets believe the Fed is serious about tackling inflation.
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Sol Nasisi
June 17, 2008
More movement as the probability of the Fed raising rates at the August meeting to 2.25% is now equal in probability to staying at 2%.
The WSJ posted an article today saying that the Fed was reversing its stance and was more likely to keep rates at 2% in August but the markets don't show that yet. It will be interesting to see what happens over the next couple of weeks.
http://online.wsj.com/article/SB121365941834979141.html?mod=hpp_us_whats_news
It's a lock that the Fed will stay at 2% in June.
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Sol Nasisi
June 20, 2008
Major changes over the last couple of days. The momentum we were seeing for a rate increase has vanished and it now looks like markets are increasingly skeptical a rate cut will happen in August. The probability of a rate increase to 2.25% has dropped to 20%, down from 35% just a week ago. It looks like further signs of weakening in the economy - bank write downs, housing numbers, etc. - have spooked the markets. How the Fed balances inflation fears versus recession fears will determine the probabilities. For now, recession fears are winning again.
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