Fed Funds Futures Say Traders See Odds of 50 BP Rate Cut at 50%

This story on the sentiment among traders appeared on Bloomberg this afternoon. It appears the Fed’s bout of hawkishness was awfully short lived, since the latest move is in reaction to Kohn’s and Bernanke’s latest statements, plus the rising in dollar Libor, which is now 65 basis points over the Fed funds rate. The 50% expectation (52% to be precise) of a 50 basis point rate cut is an increase from a mere 2% a week ago.

From Bloomberg:

Odds the Federal Reserve will cut interest rates by half a point next week surpassed 50 percent for the first time, according to trading in futures contracts, reflecting concern banks face more losses on securities tied to subprime loans.

Chances the central bank will lower its target for overnight loans between banks to 4 percent surged more than 25-fold during the past week after policy makers froze assets in a state-run investment account for Florida schools and analysts forecast deeper losses at the world’s largest investment banks….

Last month, futures contracts showed the no chance of another cut after the Fed said third-quarter economic growth was “solid” and “strains in financial markets have eased” at its previous rate meeting. If the Fed shifts to 4 percent next week, that would be the lowest rate target at the central bank since November 2005.

“A 50 basis point cut was out of the question two weeks ago and now it has a 50 percent probability,” said Rick Campagna, who helps manage $3 billion at Provident Investment Counsel in Pasadena, California. “That’s amazing. It’s because of all the news, like today, that the credit crunch is still in full force.”….

Increased bets on a third straight Fed rate cut came as the three-month London interbank offered rate for dollars extended its advance begun Nov. 14, rising to 5.15 percent. That’s 65 basis points over the Fed’s target, the widest gap since Sept. 18, when policy makers lowered their benchmark rate for the first time in more than four years.