Futures on the fed funds rate traded on the Chicago Board of Trade imply a 72 percent chance of a cut to 4.50 percent
Just quickly, before class starts:
Government bond traders, who predicted six of the last seven recessions, say the Federal Reserve will lower interest rates again before the end of the year as the economy comes to a standstill.
Since the Fed last week lopped half a percentage point off the central bank’s target for overnight lending between banks — the first orchestrated decline in so-called federal funds since 2003 — traders have pushed the yield on Treasury two-year notes to almost three quarters of a point below the designated 4.75 percent funds rate. In the three previous occasions during the past 20 years when that has happened, policy makers have cut borrowing costs.
“The U.S. economy needs to grow at 2.5 to 3 percent or else it stalls,” said Bill Gross, manager of the $104.4 billion Total Return Fund, the world’s biggest bond fund. “Historically every time we get close to stall speed the Fed lowers short rates.”
The latest government data show unexpected job losses in August, sagging core retail sales and no relief in sight for the moribund housing market. Now that U.S. gross domestic product probably is growing at an annualized rate of less than 2 percent, speculation is rampant that another Fed rate cut is assured before January.
I particularly liked this part:
Interest-rate futures have an accuracy rate of less than 30 percent since 1994 in forecasting the fed funds target, an August 2006 study by the Federal Reserve Bank of St. Louis found. As recently as July 25, futures put the odds of a target lower than 5.25 percent by November at less than 20 percent.
This time, they may prove prescient, according to Lacy Hunt, chief economist at Austin, Texas-based Hoisington Investment Management Co., which oversees about $5 billion of Treasuries.
If futures have an accuracy rate of less-than-30 percent, why tell us what odds the futures market is currently offering? Moreover every time “may prove to be prescient” – they just only do 30% of the time.
Pretty funny. No joy for the US dollar, then…