Fed fund futures are pricing in a 40% chance of a 75bp rate cut by the year end, following negative U.S. housing data and the U.S. Government's announcement that it will pump $800 billion to revive mortgage and consumer credit markets.
However, markets still remain fully priced in for a minimum 50bps rate cut at the Dec. 16 meeting.
The U.S. government announced Tuesday it will spend $600 billion to take on the obligations of Fannie Mae, Freddie Mac and Ginnie Mae in order to reduce borrowing costs for the government-sponsored enterprises (GSEs). Another $200 billion will be used to support small business and consumer loans. Of the total, only $20 billion will come from the Treasury's $700 billion Troubled Asset Relief Program (TARP).
U.S. house prices declined 1.3% over the month of September, following August's downwardly revised -0.8% figure, according to the monthly house price index from the Federal Housing Finance Agency (FHFA).
The S&P Case-Shiller U.S. home price index fell more than expected in September as the 20-city composite index posted a 17.4% decline, extending August's 16.6% fall. The Case-Shiller index has fallen every month since peaking in July 2006.
Michael Feroli, US Economist at JPMorgan Economics, writes that the Fed's injection will impact their ability to control the fed funds rate.
"Today's actions will create about $800 billion in reserves (something which is not inflationary, but we will write more about that later) arguably making it more difficult for the Fed to get the effective funds rate to trade near the target," wrote Feroli.
By Steve Stecyk
©CEP News Ltd. 2008