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 

Some brief comments were as follows:

• financial markets remain under considerable stress;
• credit has tightened further for some businesses and households;
• recent information indicates a deepening of the housing contraction as well as some softening in labor markets;
• expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation…

You can see the full statement here.

At 2:10 PM EST, about 5 minutes before the scheduled FOMC time, these were the market levels:
DJIA               12,447.46  (-32.84; -0.26%)
S&P500        1,358.17   (-4.13; -0.30%)
NASDAQ       2,348.33   (-9.73; -0.41%)
10YR-Bond   3.697%     (+0.0390)

The markets have rallied after this announcement, mostly as the tone of this announcement does not eliminate further cuts in the future.

Jon C. Ogg
January 30, 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

The Canadian central bank followed suit with a rate cut of 0.25% down to 4.0%, but that was essentially the only matched effort.  It was also deemed a small effort.  So far the coordinated global intervention from central banks hasn’t happened.

It is believed that the Bank of England AND the European Central Banks need to follow suit with rate cuts.  More than rate cuts need to be seen, but this is the easiest start that doesn’t require legislation and doesn’t require other stimulus packages that will take 60 to 120 days to be enacted.  The Bank of England currently has a 5.50% benchmark rate and the ECB’s benchmark rate is currently 4.0%.  Both the U.K. and the E.U. have room to bring rates down.  It almost appears as though these central banks are more worried about inflation more than they are about trying to keep up growth or propping up financial markets.

These two central banks should look at the drop in commodity prices in recent days as the global inflation and global growth trades are being partly to largely unwound, depending on which country you are in.  They will suffer from U.S. counterparty risks too if there is any major shoes that drop.  If they wait for 30-day to 90-day old data to confirm the facts for posterity, it may be too late.

The good news is that there is always today and two more days this week after today.  Yesterday we had noted the chances that the FOMC would provide an intermeeting emergency intervention, or if not we were going to probably see a 1,000 point drop in the DJIA.

Who knows, maybe the central bankers and their wives from England and Europe want to be able to use that overwhelming strength of the Euro to come shopping in New York City before they lower rates.  They better take those trips quick and then follow these rate cuts, otherwise they’ll get to feel this same pinch.  The FOMC averted a huge drop in the U.S. markets that also propped up European and Asian markets.  Its now the turn of the U.K. and the E.U.

Jon C. Ogg
January 23, 2008

"The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.  While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.  Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets….. The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully."

The FOMC also noted that appreciable downside risks to growth remain and it will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

This is what we were hoping for.  While we would have rather seen this occur during market hours, maybe looking a gift-horse in the mouth isn’t necessary.  We still have the scheduled meeting on January 29 and 30 next week.  This won’t fix all of the problems out there, but it’s a start.

Jon C. Ogg
January 22, 2008

The largest culprit isn’t earnings guidance out of companies that have reported.  That actually looks OK if you consider the environment.  This bond insurance counterparty risk could create a whole new wave of writedowns, but it could actually create worse actual charges instead of just paper value charges.  But now we have the DJIA futures indicated down 475 points or so.  Just yesterday we noted the possibility of a 1,000 point drop in the DJIA.

The Federal Reserve is far behind the curve.  It is our belief that a stimulus package will not be limited solely to this $140 or $150 Billion consumer package hinted at last week.  As part of "Financial Mergers May Be Mandated Rather Than Preferred" the Federal Reserve must take actions.  What has to occur is a Fed Funds cut.  Some want 50 basis points and some want as much as 75 basis points shaved off.  But there is also the Discount Rate that needs to be cut even more than Fed Funds so that banks can have a better shot at tapping the discount window at rates lower than they can invest or loan the money out at.

The Bush stimulus package hints last week were not given much fanfare.  If the FOMC decides that it should wait until the January 29 to 30 meeting to take action then they will be even farther behind the curve than they have been this whole time.  We’ve noted that we are already in a recession and the backward numbers just haven’t caught up yet.  Just last week Bernanke was discussing a slowing growth as though "it hasn’t happened yet" and maybe it won’t.  They can wake up and take immediate action to minimize just how deep the slowdown goes into recession. 

Otherwise, well maybe they might want to tell the public that the best way to make money is by shorting the stock market.  Its been more than 20 years since the last crash in 1987, so maybe Bernanke and friends want to see how the public reacts so they can add it to their behavioral theory discussions.

Jon C. Ogg
January 22, 2008

Here is the page where you can access the full statement from the FOMC and compare to prior rate cuts. Here are critical developments around today:

• T. Boone Pickens was just on the tape calling for $100+ oil and the current environment to become the norm.
• 24/7 Wall St.’s own Douglas McIntyre was just noting how the FOMC decision to cut rates could take us up to 15,000 on the DJIA (only 9% away).
• Here was our coverage on the last FOMC OUTLOOK FOR 2008.
• Bond King Bill Gross of PIMCO was calling for 3 1/4% FED FUNDS.
• Goldman Sachs calls recession chances around 45%.

At 2:11 PM EST the DIAMONDS Trust (AMEX:DIA) thattracks the DJIA was up $0.37 to $137.76 and the iShares Lehman 20+ Year Treasury ETF (NYSE:TLT) was up 0.7% at $91.89.  The DIAMONDS are now down 0.4% or so.

We won’t rush for the doors nor will we get the pom-poms out for this one today, particularly as many planned FOMC meeting reactions are ultimately reversed more than once in the minutes after an FOMC announcement.

Jon C. Ogg
December 11, 2007

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

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

• Unanimous on decision to cut rates;
• Skeptical about payrolls numbers, but they were unanimous in decision to cut and trimmed economic outlook for rest of 2007 and 2008 with firming growth likely in 2009;
• Financial markets still fragile and concerns over weakening consumer spending;
• Grew more confident that inflationary pressures and concerns would come down.

This may at least give the FED RATE HOPEFULS with a slightly better argument that the FED is willing to further cut rates in light of recent economic numbers.  That may or may not be the case and with a possible dollar crisis the FOMC has some careful decisions to make on rate cuts or keeping rates where they are.  Traditionally there are no "one and done" moves, but we have a mostly new FOMC than under Greenspan so we aren’t endorsing a definite policy either way as of yet.

As a reminder, many of these initial market reactions change after more time has been given to absorb all of the data and the turns.  Here are the full FOMC MINUTES.

Jon C. Ogg
October 9, 2007

We got on the 50 basis point cut to 4.75% on FED FUNDS and got a 50 basis point cut to 5.25% on the DISCOUNT RATE.  The markets have initially reacted in favor when you compare NOW to 2:10 PM EST.  The DJIA is now up some 200 points, although we won’t speculate where these end up.

Here is the STATEMENT from the FOMC.

If you’d like to compare how this looks in comparison to the minutes of the August 7 meeting (released August 28), you can link to that here.

Here is a snapshot of where the markets were at 2:10 PM EST a few minutes ahead of the decision:
DJIA          13,478.86; +75.44 (+0.56%)
S&P500    1,485.77; +9.12 (+0.62%)
NASDAQ    2,591.06; +9.40 (+0.36%)
10YR-Bond 4.501% (+0.031%)

This follows today’s PPI release today that was great for the inflation hawk worries, although I have heard more people questioning the data than there are believers.  We also had the weakest homebuilder sentiment reading supposedly in about 20 years.

Jon C. Ogg
September 18, 2007