FOMC: The Certainty Of Rate Cuts

There is no question about Fed Fun Futures showing a 100% chance of a rate cut at 2:15 PM EST today.  The verdict awaited is whether we see a 50 basis point cut or a 25 basis point cut.  We looked at Fed Fund Futures late Tuesday and the our math came to an 86% chance for a 50 basis point cut, or only about 14% for a 25 basis point cut.  So we’re looking at either a 3.25% or 3.00% Fed Funds Rate.

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