Fed funds futures are pricing in an 80% chance of a 50 bps rate cut by the year-end FOMC meeting, following a negative drop in the core CPI rate.
The implied probability for a 50 bps rate cut has fallen steadily from 94% a week ago to 88% a day ago.
The seasonally adjusted U.S. Consumer Price Index saw its biggest monthly decline ever with a full percentage point drop in the all-items index for October, while core inflation fell 0.1% against expectations of a 0.1% gain, according to data released by the U.S. Labor Department on Wednesday.
The 0.1% fall in the core rate marks the first negative monthly print since 1982, following a 0.1% rise in September and a 0.2% increase in August.
RBC Fixed Income Strategist T.J. Marta expects the Fed to continue with monetary policy easing as inflation lowers and tightness in credit markets persists.
"At a minimum, the policy rate will be kept at a stimulative 1% over the twelve months ahead, supplemented by policy actions geared to directly addressing distressed areas of the financial system as they emerge," Marta wrote.
TD economists Charmaine Buskas and Richard Kelly are forecasting that the Fed will make the Fed funds rate well below 1.00%.
"Going forward, we think that another 50 bps easing is in the pipeline, but there is the possibility that the Fed needs to ease more and could even take the fed funds rate to zero," they wrote.
By Steve Stecyk and edited by Sarah Sussman
©CEP News Ltd. 2008