FED FUND FUTURES PRICE IN OUTSIDE CHANCE OF 50 BASIS POINT RATE HIKE
07:16 EST 02/02 --- Market Gives a 25-Basis-Point Tightening a 100% Probability
By Alyce Andres
CHICAGO (MktNews) - February fed fund futures Tuesday priced in what traders said is an "outside chance" of a 50-basis-point rate hike at this week's Federal Open Market Committee meeting despite near-unanimous expectations of only a 25-basis-point increase.
Glenn Havlicek, a senior managing director at Chase Manhattan Bank in New York, said the Fed will likely limit its action Wednesday to 25 basis points in the Fed funds rate. However, he added there are a few arguments for a 50-basis-point hike.
"The powerful disinflationary trend may have been quashed," Havlicek said, pointing to still-rising crude oil prices. In addition, the prices paid component of the National Association of Purchasing Managers's January survey reported Tuesday was robust at 72.6, the highest level seen since April 1995, he pointed out.
Another argument for a 50-basis-point rise would be the Fed's "pass," or lack of action, at its December 21 FOMC meeting, he said. That meeting likely would have produced a 25-basis-point tightening had it not preceded Y2K, Havlicek said.
But Joe Giagrande, a proprietary trader at Tradelink L.L.C. in Chicago said, "There is no reason to believe the Fed will alter their pattern" and increase the Fed funds rate by 50 basis points rather than their previously established 25-basis-point increments.
Giagrande said he expects a 25-basis-point move Wednesday and another at the March 21 FOMC meeting. "After that, it is anybody's guess," he said.
"It takes about six to 12 months for Fed policy moves to take effect," Giagrande said. By spring, the U.S. economy may start to feel the impact of the three tightenings from last fall, he said.
As mid-year approaches, the U.S. economy may begin to slow, a situation which would "change the Fed policy landscape," he said.
Havlicek said "we are on the cusp of things kicking in," referring to last year's 75-basis-point tightening. If the Fed wants to do everything but raise the Fed funds rate 50 basis points, they could "talk tough" on its bias, Havlicek said. In addition, a "more emphatic" move may be to increase the discount rate to 5.25% from 5.00%, but that is not likely, Havlicek added.
As of Tuesday morning, Feb federal fund futures priced in 100% chance of a 25-basis-point rate hike, and as much as a 32% chance of a 50-basis-point tightening at Wednesday's Fed meeting.
Strategically, Giagrande said, "there is not much opportunity out there," in Feb fed funds. Feb fed fund futures were trading near 94.185 Tuesday afternoon.
If the Fed manages reserves well in February, fair value for the Feb fed funds would be approximately 94.26 to 94.265, estimated Giagrande. That may imply that there is a buying opportunity in the Feb. However, "if you buy Feb and they go 50, you could lose your job," he warned.
Pit sources did report some buying in the Feb contract early Tuesday, but said it was likely a bank hedging against a long funding position rather than a new speculative long.
Going out the curve, the April fed funds also priced in another 25 basis points worth of tightening at the March 21 FOMC meeting and a total of 75 basis points in rate hikes by the second-half of 2000, Giagrande said. |
