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Fed Funds Futures

Written by A Forex View From Afar on Monday, March 03, 2008

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Fed Funds Futures

Traders are starting to perceive a bigger Interest Rate cut for the March FOMC Meeting it seems. Some markets are already pricing in a 75 basis point cut as a result of Mr. Bernanke's Testimony in front of the US House of Representatives Committee on Financial Services and Senate Committee on Banking, Housing, and Urban Affairs.

Even if the possibility of a 75 basis point rate cut is low at this moment, currently reading at about 30%, I'm getting the impression that Fed Fund Traders are pushing this too far; a 75 basis point cut would imply a 300 Basis Point cut in a couple of months, at the same time that Inflation is knocking on the back door.

If another wave of bad economic figures appear before the March 21 Fed meeting, then the probability and expectation of a 75 basis Point cut will only grow; but will the Fed be able to provide it and still control the Inflation Dragon? It seems that the recent decreases in lending still have not filtered through to the Lenders, and by the time that the standard 6-9 months has passed that it normally takes to see Rate moves impact, the U.S. could already be coming out of its Contraction phase, and the Fed will be looking to raise in quick time. This has 2004/5 written all over it, and that then likely means that in 2010 we start the moves lower again.

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