Thursday, July 26, 2007

Markets Looking for a Rate Cut

by Calculated Risk on 7/26/2007 08:26:00 PM

The futures market is now pricing in a rate cut in December with some chance of a rate cut by October. From the WSJ: Futures Markets Bet Fed Will Cut Rates This Year

Trading in December fed funds contracts translates into the market giving 100% certainty that the Fed will cut rates to 5% by the Dec. 11 Fed meeting from the current 5.25% rate. That is up from about a 44% chance at Wednesday’s close. The market is pricing in roughly 50% odds that the FOMC could cut the rate as early as the September or October meetings.
That doesn't quite fit with the data from the Cleveland Fed, but clearly market participants see the odds of a rate cut increasing. And yes, that is a 20% implied probability of a 50 bps rate cut by the October meeting:

Cleveland Fed October Meeting Outcomes

There is no question what the impacted CEOs want: AutoNation CEO Urges Rate Cut To Prop Up Sagging Vehicle Sales
The chief executive of the nation's largest publicly traded auto-dealership chain is disputing suggestions that the housing slowdown is contained, attempting to drum up support for interest-rate cuts that would help sagging vehicle sales.

Mike Jackson, head of AutoNation Inc., ... took issue with Federal Reserve Chairman Ben Bernanke's recent suggestions that the housing slump won't significantly crimp economic growth over time. "Absent a rate cut, which will both have a financial impact and a psychological impact, I think it's going to take a long time to work through -- a long time," Mr. Jackson said of the housing correction. "The stress in housing is significant, the stress in automotive retail is significant."