You will want to check your own math here on the CBOT Fed Fund Futures Page as this was done on the fly and not at the office.  On Friday, the chance of a rate cut was only about 7% as SEPT-2008 fed fund futures were $98.0175.  What is funny now is that the further yougo out on the curve, the more likely a rate becomes.  If you go to OCT-2008, there is now a roughly 68% chance that we’ll see a rate cut of 0.25%.  In NOV-2008,we have an 88% chance of a rate cut of 0.25% versus versus a 26% chancejust on Friday.  And if you go to DEC-2008 or into 2009, we cross thegreater than 100% mark for a 0.25% rate cut.  That was only a 34%chance as of Friday.  The peak month as of today is April-2009, and bythen there is even about a 76% chance that the rate cutscould be as much as 0.50%.  None of this is assured.  It is solelybecause of today’s financial stock sector malaise withinstitutions on the brink of implosion and failure.

Wasn’t it just a couple weeks ago that everyone was talking about RATEHIKES?  That is Wall Street for you.  But now you have seen theseizure of Fannie Mae and Freddie Mac.  You have seen the government-backed bailout/buyout of Bear Stearns, the quick-sale of Merrill Lynch,the Chapter 11 filing of Lehman, and an AIG that looks financially lessable to sustain itself than if it had accountants and complianceofficers from the dementia wards.

Now there is just one small problem.  The rate cuts, evenif they do come to pass, are not going to help.  All of these institutions need majorde-leveraging to become healthy again.  They need borrowersto pay for their mortgages, their car loans, their home equity loans,and their credit card loans.  They also need unlimited amounts ofliquidity available for them to borrow. 

Unfortunately, there just isn’t enough cash and liquidityto go around for everyone.  Even if this round gets resolved, there arefundamental problems and they cannot just be gotten out of byannouncements that portfolios and units are for sale.  Lower ratesaren’t going to help the problem.

Jon C. Ogg
September 15, 2008 

It is the belief of 247WallSt.com that Bernanke & Co. finally saw the whites of the U.S. economy’s eyes about to overrun them in flight over the Martin Luther King holiday weekend.  The 75-basis point cut was the first and it wouldn’t make sense for the FOMC to go back to a wait-and-see posture with only a 0.25% cut.  The WSJ and Bloomberg both have consensus at 3.00% for Fed Funds.

When we look further out at Fed Fund Futures there is a great chance that we may see the Fed Funds rate at sub-2.50% by the of July 2008 and a shot at 2.25% by the end of August 2008.  We caution that using Fed Fund Futures were almost like having a crystal ball under the Greenspan era, but the market doesn’t quite have the same certainty in its predictions so far under the Bernanke regime.  We are fairly certain for a 50 basis point cut today in the both the Fed Funds rate and the Discount Rate, but we will want to wait and see if we agree with the farther dates. 

We still argue that we are in a recession regardless of the economic numbers, although the causes of this recession are far different than past recessions.  The cures are much more different too.  Unfortunately it looks like we all have some debt to pay down and we need to take a spending break.  Rewarding the sins of excessive liquidity and ease of way to much liquidity by offering more liquidity is ironic. 

The Congressional Stimulus Plan is going to take some time.  We think that depository reserve limits will be up for change soon and other stimulus will come into play very soon, including methods of regulators looking the other way on certain ratios, not minding regional caps as much as in years prior, offer incentives in financial mergers, and much more.  After all, why would we have said "Financial Mergers May Be MANDATED Rather Than Preferred" to save the economy?  The great bail-out conspiracies live. 

Rates will help, but we have a solid rough patch to go through whether future short-term borrowing rates are 2.0% or 3.5%.  If we only get a 25 basis point cut, it’s hard to imagine either of Wall Street OR Main Street being fiscally excited about the markets. Stay tuned.

Jon C. Ogg
January 30, 2008

But as our rates fall we run the risk of creating a further slide in the US greenback into a near crisis level.  That may be extreme wording, but it isn’t extreme from where we were.  Late today, the Euro cost $1.4362 per Euro and the US Dollar gets weaker more days than it doesn’t.  In January this was briefly under $1.30 and two years ago we were under $1.20.

The US Dollar and the Canadian Dollar now appear to be inverted with $1 US equaling C$0.9622.  $1 US now equals 114.29 Japanese Yen, although that reading hasn’t gone to hell in a hand basket like the US Dollar versus Canadian Dollars or Euros.  When it comes to many in the U.s. demanding that China decouple its strict peg to the U.S. Dollar, all that can be said is "be careful what you wish for, you might get it."

The U.S. consumer is stretched and it sure seems like the expected holiday sales may not come as well as even the revised retail associations are predicting.  real estate is still in the tube and we haven’t even reached the new mortgage rolls and resets coming in Jan-Feb 2008.  Inflation is dependent upon your review of whether or not we live in a nominal CPI world that includes food, energy, medicine, and insurance, or if we live in a core-CPI world that doesn’t include those prices.

The meeting decision will appropriately come on October 31, and the decision will hide behind a ghost mask until 2:15 PM EST on Halloween.  Hopefully November 1 being the Day of the Dead will only apply to Mexico’s celebration honoring dead family and friends.

It is the belief from 24/7 Wall St. that we have two more rate cuts coming with the potential for three more cuts, but it is our belief that the cuts from here on out will be in 25 basis-point increments barring anything much more drastic than we’ve already seen. 

The brokerage firm earnings were not all good and we won’t see the real effects from the 50 basis point cut already seen for another quarter.  Property prices have to still come down, and some more housing and car repos still have to get worked out.  Using the home as a piggy bank has ended and mortgage qualifications have tightened severely.

But there is some more that has to work itself out.  We have yet to see any real bank or lending institution failures outside of these leveraged mortgage brokers that were mere one hit wonders.  More pain is coming, but the FOMC has to take charge and do measured cuts from here to a true equilibrium rather than a big overshoot too fast.  Otherwise we’ll all be looking at our savings in U.S. Pesos.

Jon C. Ogg
October 26, 2007

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. Economic growth was moderate during the first half of the year.  Financial markets have been volatile in recent weeks, credit conditionshave become tighter for some households and businesses, and the housingcorrection is ongoing. Nevertheless, the economy seems likely tocontinue to expand at a moderate pace over coming quarters, supportedby solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months.However, a sustained moderation in inflation pressures has yet to beconvincingly demonstrated. Moreover, the high level of resourceutilization has the potential to sustain those pressures.

Although the downside risks to growth have increased somewhat, theCommittee’s predominant policy concern remains the risk that inflationwill fail to moderate as expected. Future policy adjustments willdepend on the outlook for both inflation and economic growth, asimplied by incoming information.

The Statement from the June 28, 2007 meeting still noted moderate growth despite the ongoing adjustment in the housing sector.  The FOMC needed to address this housing to include serious recent changes in lending markets.  It also previously said it expected the economy to continue to expand at a moderate pace over coming quarters.  The FOMC also stated on June 28: In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

CONCLUSION……

No one was expecting a rate cut today.  What was expected was more accomodative and easier language that showed concern about the credit markets.  The FOMC isn’t showing any real concern over the market malaise in housing and the liquidity crunch seen in the credit markets.  This is not going to be viewed a Federal Reserve that is nervous nor one that is going to come to the rescue any time soon.  So far the DJIA, S&P 500, and NASDAQ have dropped well into negative territory since Bernanke & Co. have spoken.  The market probably won’t think these guys are completely asleep at the wheel, but there definitely isn’t any sense of this FOMC wanting to be a guardian angel.

Many of these initial post-FOMC market reactions are rapidly reversed, and the Fed-Speak language here is always open to at least some ongoing interpretation.

Jon C. Ogg
August 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.