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
Sam Cass
June 23, 2008
I'm not sure the Fed is going to raise rates at all. I think you'll see the economy weakening further. Here are a few good articles to check out on this:
http://www.dailypfennig.com/
And from Barrons:
http://online.barrons.com/article/SB121395872186691599.html
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Sol Nasisi
June 25, 2008
No real changes. Everyone is betting rates will stay at 2% but we'll know for sure at 2:15 tomorrow (Wed, June 25).
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Sol Nasisi
June 27, 2008
The Fed did indeed stay at 2% as the markets predicted. Today, we added the probabilities for September. They are all over the place. I haven't seen such a cluster of probabilities since I started following the probabilities. Markets are uncertain although they they believe the highest probability rests with the Fed staying at 2% (almost 40% probability).
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Sol Nasisi
July 03, 2008
Probability of holding at 2% in August and September have firmed slightly. The Fed is still straddling the fence between recession and inflation. Interesting to see how this breaks.
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Sol Nasisi
July 10, 2008
Barring any unforseen financial crisis, August looks like a lock to stay at 2%. For September, 50% probability of staying at 2% and 25% probability of an increase to 2.25%. The probability of going to 2.25% has actually increased over the last week so the markets still seem to think that inflation concerns will outweigh bank problems and a weak economy.
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Sol Nasisi
July 17, 2008
Interesting moves today based on the events of the last week - Freddie and Fannie, Indymac, etc. For August, the probability of staying at 2% is now above 90%. As was mentioned before, this is a lock.
For August, the probability of staying at 2% has increased slightly after taking a dip a week ago. More significantly, the probability of a rate increase to 2.25% has dropped while the probability of rates declining to 1.75% has shot up from 10% to over 20%.
For now economic weakness is winning out over inflation fears in the markets.
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Sol Nasisi
July 23, 2008
2% still a lock for August. Brief blip in probability of rates dropping in September is gone. Most likely scenario in September is staying pat at 2%. Not even near collapse of Fannie and Freddie could alter that probability significantly.
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Sol Nasisi
July 30, 2008
No real change. 2% still a lock for August. It also looks like the Fed will stay at 2% in September. Chances of a rate cut look very minimal. Interesting that probability of rate increase to 2.50% is now the same as probability of increase to 2.25%. Markets seem to think that increases are more probably than decreases at this point.
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Sol Nasisi
August 06, 2008
As expected the Fed stayed at 2%. Betting is that it will continue to do so into September.
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Sam Cass
August 07, 2008
60% chance and rising the Fed will stay at 2% in September. I put the October chart on and staying at 2% is the highest probability. Bit if a spike in rates going to 2.25% so will be interesting to see how that develops. Stay tuned...
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