Futures Market 80% Certain Fed Will Cut Short-Term Rates by 75 Basis Points At or Before The December 16 Fed Meeting

Responding to this morning's dismal employment situation report, the fed funds futures market is now 80% certain the Fed will cut short-term rates by 75 basis points (0.75 percentage point) at or before the next Fed meeting. In other words, the market now believes that an aggressive, 75 basis point cut is more likely than unlikely. This website's official forecast, however, is that the Fed will cut short-term rates by at least 50 basis points at or before the December 16^TH Federal Open Market Committee (FOMC) monetary policy meeting.

In all likelihood, the following recent economic news had at least some influence on the fed funds futures market this week:

• Earlier today, the Labor Department reported that non-farm payrolls declined by 533,000 during November 2008, and the unemployment rate rose from 6.5% to 6.7%. Revisions to the October and September non-farm payroll figures added more gloom to the day's somber employment news. Non-farm job losses for October were revised up from 240,000 to 320,000, while the September figure was also revised higher, from 284,000 to 403,000. For the week that ended on November 22, 2008, the number of Americans on the dole rose by 89,000 to 4.087 million.
  
• Yesterday saw a couple of aggressive rate cuts in Europe. The European Central Bank (ECB) cut its benchmark rate by 75 basis points to 2.50%, while Britain's central bank, the Bank of England, cut its key lending rate by 100 basis points to 2.00%.
  
• The effective fed funds rate, which is the volume-weighted average rate at which American depository institutions made overnight loans to each other via the Fed, was last reported at 0.16%, and was 0.63% a week ago. The current target for the fed funds rate is 1.00%.
  
• On Wednesday, the Labor Department reported that during the third quarter of this year, American, non-farm productivity improved by 1.3%, but this modest improvement was coupled with a 2.8% jump in labor costs.
  
• On Thursday, the U.S. Census Bureau reported that Factory Orders declined by 5.1% during October. Wall Street forecasters were expecting a drop of about 2.8%.
  
• Earlier today, in its National Delinquency Survey, the Mortgage Bankers Association (MBA) reported that:
  

  
  "...The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 6.99 percent of all loans outstanding at the end of the third quarter of 2008, up 58 basis points from the second quarter of 2008, and up 140 basis points from one year ago on a seasonally adjusted basis..."

• The yield on the benchmark 10-Year Treasury Note ended the week at 2.657%. The yield on the 91-day Treasury Bill finished the week at 0.01%, and was 0.005% yesterday.
  
• The TED spread, which is the difference between the yield on the 91-day Treasury Bill and the 3-month LIBOR yield, ended the week at 2.18 percentage points. For large, international banks, the TED spread gauges the willingness of these banks to lend money to each other. A TED spread that is somewhere between zero and 1.00 percentage point is considered normal.
  
• Crude oil for future delivery ended the week at $40.81 per barrel in New York. That's a decline of $65.42 (61.583%) since crude closed at $106.23 per barrel on September 5, 2008.

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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 50 basis points (0.50 percentage point) at or before the December 16^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 50 basis points at or before the December 16^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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