Rate-Cut Odds Up

This morning's data on U.S. jobless claims bolstered expectations for another large interest-rate cut by the Federal Reserve. At Wednesday's close, the market was priced for 40% odds that the Fed would cut the funds rate by another 50 basis points at the March 18 FOMC meeting, up from nearly 0% odds on Tuesday.

Soon after the release of the jobless-claims figures, the odds of a half-point cut increased to 92%, but have since fallen to 62%, likely because of the rebound in share prices.

For the April 30 FOMC meeting, the market is priced for 100% odds of 50 basis points in cumulative cuts (a 2.50% fed funds rate) and 40% odds of 75 basis points in cumulative cuts.

For the June 25 FOMC meeting, the market is priced for 100% odds of 75 basis points in cumulative cuts and for 12% odds of 100 basis points in cuts.

For the end of 2008, the market is priced for a funds rate of close to 2.25%. In other words, the market believes the Fed will finish its interest rate cuts by mid-year or in the summer, with the remaining cuts front-loaded over the next two FOMC meetings.

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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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