9:41 AM
FED TALK: The Fed Fund futures market is pricing in virtually a 100% chance of a 50 basis point rate cut at the Oct. 2 FOMC meeting. The October contract is trading at 2.54% this morning, up from 2.5% late Friday. The rise in the rate reflects the recent rise in the effective Fed Funds rate, which had been pushed lower by heavy injections of liquidity by the Fed that have since been reduced. So far today, the Fed Funds rate has traded between 3.00% and 3.125%, in line with the Fed's target. (Click here for the latest effective Fed Fund data.) Assuming the effective Fed Funds rate averages 3.00% (the target rate) through the rest of the month would put the average for the month at 3.08%, in line with the 3.09% rate priced into the September Fed Fund futures contract. Assuming Fed operations return to normal and the desk attempts to keep the rate at the target, the Fed Funds rate should average 2.53% in October if the Fed cuts rates on Oct. 2. The October contract is trading at 3.535%, suggesting the market is pricing in almost a 100% chance of a 50 basis point cut on Oct. 2. However, these are extraordinary times, and there could be situations where the Fed injects extra liquidity into the market once again. That risk is also incorporated into the October contract, which suggests the odds of a 50 basis point cut priced into the October contract are slightly lower than 100%. For more on the Fed's liquidity provisions and background on the Fed Funds rate, you can see "ZIRP, American-style" by Morgan Stanley's David Greenlaw. |
