50 Basis Point Cut Fully Priced In for December 16

The fed funds futures market had plenty of economic news and data to digest this week (details below.) Earlier this year, the Fed was concerned about inflation. Now it's disinflation and the prospect of deflation that's got Fed economists worried, as prices fall and credit markets remain petrified.

Traders are still 100% certain that the Fed will cut the benchmark fed funds target rate by at least 25 basis points (0.25 percentage point) at the next Federal Open Market Committee (FOMC) meeting on December 16. Currently, 16% in the market are betting that the Fed will cut rates by 75 basis points next month.

Factors that (likely) influenced the fed funds futures market this week:

• On Wednesday, the Labor Department reported that its Consumer Price Index (CPI) declined by 1.0% during October. This was the biggest retreat for the index since the government started tracking consumer prices back in 1947. Wall Street Economists were expecting a decline of about 0.7% for October.
  
  
• Also on Wednesday, the Commerce Department reported that housing starts declined by 4.5% last month, and by 38.0% between 10/2007 and 10/2008. Housing starts came in at a seasonally adjusted and annualized rate of 791,000 for October, which is the weakest figure for this metric since the government began tracking housing starts back in 1959.
  
  
• Wednesday also saw the release of the minutes from the Fed's October 28-29 FOMC meeting (short-term rates were cut by 50 basis points at that meeting.) Here are a couple of clips:
  
  

  "...Several participants observed that it would be crucial for such policy actions to be unwound appropriately as the financial situation normalized. However, participants also observed that unfolding economic developments could require the FOMC to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities..."
  
  "...Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings. In any event, the Committee agreed that it would take whatever steps were necessary to support the recovery of the economy..."

  
  
• The nation's Leading Economic Indicators declined by 0.8% last month, according to Thursday's reported from The Conference Board. Wall Street Economists were expecting a decline of around 0.6% for October.
  
  
• Thursday also saw the release of the Labor Department's weekly report on new claims for unemployment benefits. There were 542,000 new claims during the week that ended on November 15, which was 37,000 more than Wall Street forecasters were expecting. There are now more than 4 million Americans on the dole, which is the most since December, 1982.
  
  
• Another key report released Thursday was the Philadelphia Fed's diffuse index of current manufacturing conditions in the Fed's Third District, which slid from -37.5 for October to -39.3 for this month. The November figure is the lowest since October of 1990. Wall Street economists were expecting the figure to come in at around -35.0 for November. The Federal Reserve's Third District includes all of Delaware, the southern half of New Jersey and most of Pennsylvania.
  
  
• The Japanese economy, second only to the United States in size, is officially in recession, as are the Hong Kong and Singapore economies.
  
  
• The effective fed funds rate, which is the actual rate (average) at which American commercial banks made overnight loans to each other via the Fed, was last reported at 0.65% today, and was 0.42% a week ago, according to the Wall Street Journal. The current target for the fed funds rate is 1.00%.
  
  
• Mortgage leviathans Freddie Mac and Fannie Mae are suspending foreclosure sales and evictions on occupied, single-family homes from November 26, 2008 through January 9, 2009. Happy holidays.
  
  
• Crude oil for future delivery ended the week at $49.93 per barrel in New York. That's a decline of $54.62 (52.243%) since crude closed at $104.55 per barrel on September 19, 2008.
  
  
• Massive volumes of cash are still moving to the safety of government debt, even to shorter-term Treasuries which are currently offering close to nothing in return. The yield on the benchmark 10-Year Treasury Note fell to 3.167% today, while the yield on the 3-Month Treasury Bill fell to 0.01%.
  
  
• Breaking news that President-elect Obama is likely to nominate current New York Fed boss Timothy Geithner to be the next Treasury Secretary acted as an adrenaline shot for stocks. With less than an hour before the closing bell, stocks rebounded hard on the news. The Dow Jones Industrial Average (DJIA) shot up by more than 500 points to end the day with a gain of 494.13.
  
  
• Despite today's Geithner-inspired rally, the 3 major stock market indexes (1, 2, 3) ended lower on the week and declined to year-to-date lows. Bear Market Update: since closing with record highs on October 9, 2007, the DJIA has now lost 6,118.11 points (43.193%), while the broader S&P 500 Index has declined by 765.12 points (48.885%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 16^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 25 basis points at the December 16^TH, 2008 FOMC monetary policy meeting: 100% (certain)
  
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)
  

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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