Market sentiment indicates it is all but a certainty the Federal Open Market Committee will ease short-term interest rates 50 basis points at the end of its two-day policy meeting Wednesday.
In addition, credit markets also are front-loading further near-term rate cuts in the wake of a Goldman Sachs analysis painting a scenario that could force the Federal Reserve to trim rates 200 to 300 basis points more before year-end.
The February federal funds futures contract–the most accurate barometer of Fed interest rate policy–Monday indicated a 96 percent probability Wednesday’s Fed announcement would be for an additional 50-basis-point easing. Fed funds have accurately predicted interest rate policy for 37 of the past 38 policy meetings.
“It would be a major surprise to see anything less than a 50-basis-point easing,” said trader Lawrence Malato. “What is surprising is to see the action, the market direction, in the nearby months.”
The March fed funds contract Monday indicated an additional 50-basis-point cut will occur at the FOMC’s March policy meeting. That forecast comes on the heels of Goldman Sachs estimating the U.S. economy stands a 1-in-3 chance of recession this year.
