Half-Point Inter-Meeting Fed Rate Cut Now Fully Priced In

The Federal Open Market Committee's next policy meeting is scheduled for October 29, but trading in options on Fed Funds futures suggests the market expects more immediate action.

Rather than wait until Oct. 29, many economists believe the Fed will take action — perhaps in concert with a group of central banks — prior to that day, and perhaps as early as later in the week. Currently, the October federal-funds futures traded on the Chicago Board of Trade have an implied yield of 1.41%, which fully prices in an interest-rate cut of a half-percentage point at some point prior to the Oct. 29 scheduled Fed meeting.

Whether this alleviates the logjam that has bedeviled various short-term indicators of stress is another matter. The spread between LIBOR and the anticipated funds rate sits at record levels, and short-term bond yields also suggest massive stress. Lowering the funds rate may make it easier for banks to hoard cash — as it will cost less.

What's more, the options trading implies a 40% chance of a full-point cut (lowering the Fed Funds rate from 2.00% to 1.00%), by the adjournment of the October meeting.