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The weekend’s events have changed the calculus for the Federal Reserve, many economists say. Numerous researchers on Wall Street have adjusted their expectations for the outcome of the Fed’s meeting tomorrow, and futures markets are now tilted in the direction of an interest-rate cut of a full percentage point.
March federal-funds futures traded on the Chicago Board of Trade trade with an implied yield of 2.57%. If the Fed were to cut rates by a full percentage point, the average market rate for the month would be about 2.55%, so the oddsmakers are putting a 96% chance on a full point cut, something economists believe has to happen.
“They’ve got to cut 100 — they need big bold moves, and rates have to go back to 1%,” says Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “I wouldn’t be surprised if there weren’t conversations over the weekend among policymakers that included ‘What are we going to do at the meeting.’”
Several economists, including those at Goldman Sachs, BNP Paribas and IDEA Global changed their forecasts, believing the Fed will take more aggressive action. But not all were in agreement, as Wrightson ICAP wrote that the Fed’s liquidity-related actions — the establishment of a new facility allowing primary dealers to borrow from the discount window — “will allow the FOMC to take a somewhat more measured approach in cutting the funds rate target on Tuesday.”
But that view is a minority one, as Mr. LaVorgna says. “If they go 75 markets will react nevatively and push them to do more.”
The weekend’s events have changed the calculus for the Federal Reserve, many economists say. Numerous researchers on Wall Street have adjusted their expectations for the outcome of the Fed’s meeting tomorrow, and futures markets are now tilted in the direction of an interest-rate cut of a full percentage point.
March federal-funds futures traded on the Chicago Board of Trade trade with an implied yield of 2.57%. If the Fed were to cut rates by a full percentage point, the average market rate for the month would be about 2.55%, so the oddsmakers are putting a 96% chance on a full point cut, something economists believe has to happen.
“They’ve got to cut 100 — they need big bold moves, and rates have to go back to 1%,” says Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “I wouldn’t be surprised if there weren’t conversations over the weekend among policymakers that included ‘What are we going to do at the meeting.’”
Several economists, including those at Goldman Sachs, BNP Paribas and IDEA Global changed their forecasts, believing the Fed will take more aggressive action. But not all were in agreement, as Wrightson ICAP wrote that the Fed’s liquidity-related actions — the establishment of a new facility allowing primary dealers to borrow from the discount window — “will allow the FOMC to take a somewhat more measured approach in cutting the funds rate target on Tuesday.”
But that view is a minority one, as Mr. LaVorgna says. “If they go 75 markets will react nevatively and push them to do more.”
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