Fed funds futures are pricing in an 80% chance that the Federal Reserve will slash rates by 50 bps by Dec. 16 following the U.S. Treasury's announcement that it will revise its loan agreement with U.S. insurance company AIG.
However, the implied probability for a minimum 25bp rate cut remains fully priced in.
According to the new terms of the loan agreement, the Fed will loan AIG $60 billion rather than the original $85 billion, and the Treasury Department will purchase $40 billion in the firm's shares under the TARP program.
Analysts at Barchart.com expect the Fed to only lower the Fed funds rate by 25 bps at the next Fed meeting.
"The market is discounting about a two-thirds chance that the FOMC at its next meeting on Dec 16 will cut the funds rate by 50 bps to 0.50%," they wrote. "The market is expecting the funds rate to remain at or below 0.75% through March 2009 and below 1.00% through July 2009."
Analysts at Deutsche Bank Securities are expressing concern about the Federal Reserve's ability to stimulate the economy through monetary easing.
"We think that monetization is likely to be used as a tool to get the economy and the financial system out of the crisis," they wrote. "However, the Fed's ability to maintain the effective funds rate near the target is being hampered by high excess liquidity and low Treasury bill yields."
By Steve Stecyk and edited by Nancy Girgis
©CEP News Ltd. 2008