Fed meeting and the potential decline in interest rates

The equity markets have been anticipating a Fed cut based on the movement of stocks and a close look at the interest rate options markets tells the same tale. The Federal Reserve Bank of Cleveland reports the probability of a Fed funds change using the Fed funds options market. This information is also available from Bloomberg in a slightly different format.

http://www.clevelandfed.org/Research/policy/fedfunds/index.cfm

With the latest economic announcements being relatively benign for a no change in policy, the market has surged to over a 70% probability of a decline to 4.25%. There is also a 40% probability for another cut in January. The market wants a cut for Christmas and they are expecting their present earlier.

The December Fed meeting and the announcements this week get close to closing the books for year. There usually is not a lot of volume and volatility after the 15^th of the month. However, it has often been the case the trends that area in place in early December continue until the end of the year. The biggest surprises for the credit markets will still be in subprime – SIV markets. The money markets are still behaving like we are facing millennium year-end risks.