Fed Funds Rate Discussion

Updated: December 5, 2008

MAJOR SHIFT IN PROBABILITY FAVORS CUT TO .25%. Just when it seemed that .5% was settling in to be the market's choice, .25% suddently sprang to the forefront. As the charts below show, markets now believe that there is a geater than 50% probability that the Fed will cut rates to .25% at its December meeting. This probability actually drops off slightly to a little under 50% for January. No doubt the recent spate of very negative reports spooked the markets and made it realize that the recession is worsening, not getting better after 12 months. Also notice how the probability for a cut in the Fed Funds Rate to 0% has grown to almost a 20% probability. Clearly, the markets believe the Fed is going to take unprecedented action to combat the downturn, and that includes dropping rates to 0% eventually and using a basket of tricks called quantitative easing. It's becoming clearer by the day that the best analogy for our economy is Japan in the 1990s, where the popping of a massive real estate bubble led the Japanese Central Bank to cut rates to 0% and to inject liquidity into the market. Japan suffered through a ten year recession and even today has not regained its past economic vigor.

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 to .25, bank rates will fall more steeply. While rates have remained fairly steady depsite repeated Fed rate cuts, it's hard to imagine them remaining at current levels in such a scenario.

FederalFundsRatePredictions