Fed Funds Rate Discussion

Updated: November 28, 2008

PROBABILITY OF RATE CUT BELOW 1% OVER 90% . There is now an over 90% probability that the Fed will cut rates in December. The highest probability is a cut to .50% although the probability of a cut to .25% has grown significantly over the last monty and now stands at almost 35%. Several economists have expressed their opinion that rates will eventually reach 0% and while it's still a relatively small probability at approximately 17% for January, it is nevertheless a growing probability. If the economy continues to suffer, more banks fail, and the stock market continues to decline, I expect we'll see the 0% probability increase. Either way it looks almost certain that we'll be going below 1% at the December meeting. The Fed Funds rate was last at 1% between June 2003 and June 2004. It has never gone below 1%.

The Fed Funds Rate is a key indicator in determing the savings account rates, money markets rates, and CD rates that banks will pay. If the Fed funds rate goes down, banks usually lower their rates while the opposite is true if the Fed raises rates. Despite the increased probabilty of a rate cut in the coming months, CD rates and Savings rates have remained firm. Rates on 5 year CD rates have even increased slightly over the last week. Banks want your cash and can't afford to lower rates and lose deposit dollars. Deposit rates will come down slightly if the Fed cuts rates again, but it seems that the drop in the Fed Funds is no longer being matched by the banks.

FederalFundsRatePredictions