The market is sniffing out the possibility of an interest-rate cut again, after backing away a bit Thursday. The severe strains in the financial system were abundantly evident in the Federal Reserve's late-afternoon release of its balance sheet, wherein massive liquidity injections made it clear that the financial system is basically on life support at the moment.
As I noted earlier, the Fed's balance sheet indicated that the Federal Reserve had extended large loans to banks, investment banks, and AIG (AIG - commentary - Cramer's Take), while also injecting massive amounts of short-term liquidity into the banking system.
In response, the fed funds futures market is trading higher on the day. The market is priced for 100% odds that the Fed will cut the funds rate by 25 basis points at the October 29th FOMC meeting and for 20% odds of a 50-basis-point cut (the futures imply even higher odds but the futures are also priced for the idea that the Fed will let the funds rate drift below the Fed's target, as has been the case since last week).
The market is priced for the funds rate to end 2008 at 1.64%, down from 1.75% Thursday. For the end of the first half of 2009, the market is priced for the funds rate to be at 2.07%; in other words, for the Fed to deliver insurance cuts and then take them back.
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Tony Crescenzi Blog Fed Balance Sheet in Whopping Gain 9/26/2008 9:29 AM EDT The amount of money injected into the system was nearly four times as large as previous increases.
Tony Crescenzi Blog Latest Rate-Cut Odds 9/25/2008 2:50 PM EDT The odds for a cut fall a bit.
Tony Crescenzi Blog Credit Indicators Improve 9/25/2008 1:43 PM EDT Future boosts to the equities market must come from increased confidence.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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