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Strategies & Market Trends : Ask DrBob
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To: Drbob512 who started this subject5/11/2001 11:18:30 AM
From: longdong_63   of 100058
 
10:37 AM
FED TALK: Fed Fund futures contracts are pricing in a lower probablity of a 50 basis point rate cut at the May 15 FOMC meeting. The May contract is currently trading at 4.28% versus 4.26% yesterday. Since the effective fed-funds rate has averaged 4.44% so far this month, a 4.23% rate on the May fed-funds contract would fully discount a 50 basis point rate cut. Here's the math: assume that the fed-funds rate will have averaged 4.44% for the first 15 days of the month and 4.0% for the final 16 days. The weighted average computed to 4.23%. That means that the May contract must reflect 27 basis points (4.5% - 4.23%) of Fed ease to fully incorporate a 50 basis point cut. Since 22 basis points are currently discounted (4.5% - 4.28%), there are 22/27, or 81%) of the 50 basis point scenario priced in. A 25 basius point cut is fully priced in when the contract trades at 4.36% or lower. The bond market has reduced its expectations for the June 26-27 meeting by driving the July fed-funds contract to 3.94% versus 3.88% yesterday. In addition, rate expectations for 2002 have jumped sharply, with the market having added a full eigth of a point to short-term rates in March 2002 and June 2002 (using eurodollar contracts as a gauge).
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