Rate-Cut Odds Keep Rising

Rate-cut odds continue to increase, despite today's rally in share prices. The market continues to price in the possibility that there could be as many as 75 basis points in cuts by the end of February.

The February fed funds future is currently trading at 3.63%, an indication that the market sees 100% odds of a 50-basis-point cut and 48% odds of 75 basis points in cuts, although the odds include some probability that is difficult to determine with precision, that any cut over greater than 50 basis points will be delivered in February.

For the March 18 FOMC meeting, the market is priced for almost 100% odds that there will be 100 basis points in cumulative cuts, placing odds at 94%, up from 74% on Friday.

For the April 30 FOMC meeting, the market is priced for 96% odds that the funds rate will be dropped by 125 basis points, up from 76% odds on Friday.

For the end of 2008, the market is priced for 100% odds of 150 basis points in cumulative cuts (a 2.75% funds rate) and for roughly 60% odds that the funds rate will be lower than 2.75%.

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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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