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Tuesday, October 30, 2007

Options Predict The Fed Will Cut Rates

Last weekend Bob Brinker said that a 25 basis interest rate point cut is "baked in the cake." Beyond that amount, he doesn't know. How does he predict this?

The Cleveland Fed has a nice page that shows what the futures predict for rates over time: "Monetary Policy :: Fed Funds Rate Predictions." On that page they currently show this graph:

Click to view larger graph

The odds can be read off the side of the graph. The odds are now:
  • 70% for a 0.25% cut to 4.50%
  • 15% for a 0.50% cut to 4.25%
  • 15% they leave rates unchanged at 4.75%

So... there is an 85% chance we get a rate cut of 0.25 to 0.50% and 15% chance they keep rates at 4.75%. So, Bob's rate cut cake is "85% baked" as of yesterday's data.

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