On the eve of the Oct 29 FOMC meeting, Fed funds futures are fully priced in for a minimum 50 bps rate cut but are also factoring in a 38% chance for a 75bp cut.
The consensus among economists is less than certain. Of the 65 economists polled by Bloomberg, 37 are calling for a half-point cut, 16 are looking for a quarter-point cut, and 11 are predicting the Fed will keep rates on hold at 1.50%. In contrast to the implied market probability, only a single economist is expecting a 75 basis point cut.
RBC Chief Economist Paul Ferley fully expects the Federal Reserve will cut rates by 50bp points, although he doubts the rate cut will be enough to restore economic growth.
"We expect that the Fed will opt for another hefty 50-basis point rate cut to help promote a sustained easing in credit conditions in both equity and debt markets," Ferley wrote. "These actions won't prevent a US recession where a drop in GDP is expected to be reported tomorrow but are rather intended to insure that activity bounces back over the second half of next year."
Elsa Dargent, economist at Natixis North America, expects the Federal Reserve to take a more subdued approach, and cut rates by 25bps.
After the concerted 50bp rate cut with the other central banks on October 8th, the Fed is likely to ease again, wrote Dargent. "The tone is likely to be more dovish with a rebalancing of risks towards growth."
Looking to the next meeting set for Dec.16, markets remain fully priced in for 50bps cut and are pricing in a 44.5% chance of 75bp rate cut, an increase from the 43.9% expectation a day ago.
By Steve Stecyk
©CEP News Ltd. 2008