Fed funds futures are not an accurate measure of what the Treasury market is pricing in for the Federal Open Market Committee's rate decision, a strategist in New York says.

Market participants are weighing what the FOMC will decide at 2:15 p.m. EDT. Fed fund futures show that a quarter-point rate cut is fully priced in and imply a 6% chance of a 50 basis point cut.

But Carl Lantz, an interest rate strategist at Credit Suisse First Boston, said the futures contracts aren't an accurate measure of Treasury market expectations.

Fed funds futures contracts settle at the average effective rate for the month, not the Fed's target. Effective Fed funds have traded between 7% and 0.5% in the past 24 hours.

Lantz said the Fed funds market isn't pricing in a lower target but is instead pricing in massive liquidity injections. Those injections will push the effective rate below 2% and pull down the monthly average, Lantz said.

"Fed fund futures, if anything, are pricing in liquidity measures," he said. "Treasuries are not expecting a cut."

Lending credence to the idea are Fed fund options. The derivatives aren't as closely followed and less liquid but paint a somewhat different picture. They are pricing in a 41.7% of no change in rates, a 40.2% chance of quarter-point cut, an 11.3% chance of a 50 basis point cut and a 3.8% chance of a 75 basis point cut.

Lantz said he doesn't believe the Fed will cut but that officials will leave the door open for future cuts.

"I think they should ease but probably will not ¥ I don't think [the Fed] is going to do an about face," he said.

By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2008