CBOT Fed Watch

Though it surprises me that it is not weighted more heavily toward a cut of .25%, it would be safe to say the market is split over whether the Fed will cut rates by .25% or .50%:

CME Group Fed Watch – September 17, 2007: ...Based upon the September 17 market close, the 30-Day Federal Funds futures contract for the October 2007 expiration is currently pricing in a 100 percent probability that the FOMC will decrease the target rate by at least 25 basis points from 5-1/4 percent to 5 percent at tomorrow’s FOMC meeting.

In addition, the 30-Day Federal Funds futures contract is pricing in a 50 percent probability of a further 25-basis point decrease in the target rate to 4-3/4 percent (versus a 50 percent probability of just a 25-basis point rate decrease).

Summary Table
September 11: 28% for -25 bps versus 72% for -50 bps.
September 12: 26% for -25 bps versus 74% for -50 bps.
September 13: 42% for -25 bps versus 58% for -50 bps.
September 14: 42% for -25 bps versus 58% for -50 bps.
September 17: 50% for -25 bps versus 50% for -50 bps.
September 18: FOMC decision on federal funds target rate.

From the Cleveland Fed:

Comments

[Aaron]

Interesting information and a nice chart. It does surprise me that the market is split on 50 or 25, as I would think the market would be more sure of a 25 basis point cut. The Fed is still very concerned with inflation, and I believe investors have the expectations set too high for this meeting tommorrow, which is worrisome to equities. I posted a preview of the Fed meeting on my blog tonight as well:

http://www.growyourfunds.com/2007/09/federal_reserve_monetary_polic_1.html

[MostlyHarmless]

If the FOMC only reduces rates by 0.25% there would be chaos in the markets. If they reduce it by 0.5% then they are risking inflation. I bet that they will split the difference and reduce the overnight rate by 0.25% and they will reduce the discount window by 0.5%.

[rkillings]

Sloppy use of the percent symbol, Mark. A 25-basis-point cut to an interest rate of 5 percent is a 5%, not 0.25%, decrease.
There's a good reason to prefer "bps" to "%" when you reckon in percentage points rather than percent.

[gordon]

If I'm interpreting the reports right, business at the Federal Reserve's discount window has never been better:

Week ended 12 Sept. $3.158
Week ended 5 Sept $1.341
Week ended 29 Aug. $1.577
Week ended 22 Aug. $1.541
Week ended 15 Aug. $0.271
Week ended 8 Aug. $0.251

These are average daily "Loans to depository institutions", in billions of dollars. The big jump is obviously after the Federal Reserve's announcement of 17 August.

So, is this a lot or a little, in relation to the size of the problem? Has the discount window/repos strategy worked or not?

[Lafayette]

September Outcomes?

Is that anything like the wine harvest in the south of France at the same time. Which is logical since the grapes are ripe.

But, Fed rates, do they ripen too in the summer sun? Harvest time, is it?

Will wonders never cease ...

[calmo]

rkill, I know you mean well, but some may think your correction is a tad "sloppy" too. 5.25% -> 5.00% is that 25bp decline. It is also a difference of 0.25(% or 25 bp to be argued to the death it appears) and if we strain along with you we can see this as a 5% drop from 5.25% since 0.25/5.25 is 4.76% (or since you use (somewhat sloppily) 5.0 in the denominator, 0.25/5.0 = 5.0%).
Now, could we have this fine example of nit-pickery applied to the futures graph? Does the Fed view this as an accurate representation of the entire market (Mostly Harmless seems to think not) or just the Futures players?
Mostly Harmless mostly persuades me, but I think the Fed does not want to be seen as caving in to rescue speculators...or alarm the non-market with something unusual...like a departure from the 25bp steps....so I'd bet on 25bp...possibly a string of them.

[Lafayette]

A: The Fed is still very concerned with inflation

Yes, it is quite an unpalatable choice of options - inflation OR recession. Which would you chose?

Stagflation? Yes, let's have a wee bit of that, please.

Higher prices but not higher unemployment. People can always pay higher prices as long as they have a job.

[jan perlwitz]

"Yes, it is quite an unpalatable choice of options - inflation OR recession. Which would you chose?"

How would a lower target interest rate for the overnight lending of miniscule $2 billion US-dollar excess reserves between depository institutions cause inflation in a 13.7 trillion US-dollar economy with credit markets sizing up to many trillions US-dollars?

How would a higher target interest rate for this lending cause recession?

How about this alleged choice is just a figment of imagination?

[Vin]

This probabilities are erroneous. It is extremely hard to extract pure probabilities from Fed Fund futures/options at the moment as there is a substantial liquidity premium (pricing of the NY Fed injecting liquidity). Market participants focus on Binary options at the moment to get a "cleaner" probability. This is where they settled yesterday night:
>50 bp cut: 2%
50 bp cut: 37%
25 bp cut: 47%
on hold: 14%

[psummers]

As Mark Shivers points out at the Talking Fed (well worth a regular read, imho), the futures contracts pay off based on the effective rate, rather than the target rate. At the moment this biases things towards a 50bps cut, as the effective rate is below the target. Which is not to say that 50bps is a bad bet...

http://talkingfed.blogspot.com/2007/09/expectations-for-sept-18th-fed-meeting.html

PS

[Gerard MacDonell]

No. Fed funds futures pay off on the basis of the realized effective funds rate. You cannot infer Fed decision probabilities from their prices in the current environment, which funds trade sloppy to the target. Digitals are better, but illiquid. Market is heavily priced for 25 bps.

[Lafayette]

GM: Digitals are better, but illiquid. Market is heavily priced for 25 bps.

Please explain this oracular gibberish to the un-anointed here. Namely, me.