Tame Inflation Gives Fed Room To Cut Short-Term Rates Again At The October 29 Fed Meeting

Inflation

The week's economic reports as well as a sharp decline in crude oil prices give the Fed plenty of room to cut short-term interest rates again at the October 29 Federal Open Market Committee (FOMC) meeting:

• On Wednesday, the Labor Department reported that the Producer Price Index (PPI) declined by 0.4% during September; on Thursday, it reported that the Consumer Price Index (CPI) for September was flat, i.e. consumer price moved sideways last month.
  
• Also on Wednesday, the Commerce Department reported that retail sales declined by 1.2% during September. Wall Street economists were expecting a dip of about 0.6% for last month.
  
• On Thursday, the Federal Reserve Bank of Philadelphia reported that its diffuse index of current manufacturing conditions declined to -37.5 this month. Wall Street economists were expecting the index to come in at around -10.0 for October. Also from the Fed on Thursday: industrial production declined by 2.8% during September. Wall Street economists were expecting a retreat of about 0.5%.
  
• On Friday, the Commerce Department reported that housing starts declined by 6.3% last month, while building permits declined by 8.3%.
  
• In New York, crude oil for future delivery closed at $71.85 per barrel. That's a decline of $35.04 (32.781%) since crude closed at $106.89 per barrel on September 26.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 25 basis points at the October 29^TH, 2008 FOMC monetary policy meeting: 100% (certain)
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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