Fed funds futures remain fully priced in for a minimum 25 bps rate cut for the next meeting. Economists were expecting core consumer prices to rise by 0.2% in September, following a 0.2% rise in August and a 0.3% rise in July. The consensus forecast for the all-items index was a 0.1% rise.

Economist Rob Carnell of ING expects that a rate cut for the year-end meeting is a certainty after today's CPI report.

"But even the hawks, if any remain at the Fed, will have to admit that the inflation news is brightening by the day," wrote Carnell. "And so a further 50bp cut at the October 29th FOMC meeting (or before, depending on the state of the markets), is looking probable."

Economists from Commerzbank see the inflation outlook as favorable as crude oil prices retreat.

"With the inflation problem solved, the Fed is now able to concentrate fully on containing the financial market crisis," the economists wrote. "We expect a further cut in the Fed funds rate by 50 basis points by the end of the year."

For the Dec. 16 meeting, the implied probability is fully priced in for a 50 bps rate cut. Markets have now begun to price in a 16.1% chance of a 75bp cut, which would lower the Fed funds rate to 0.75%.

Looking ahead to the Jan. 28, 2009 FOMC meeting, markets remain fully priced in for a 50bp rate cut. Markets are also factoring in a 12.4% chance of a 75bp cut and a 7.6% chance of no rate change.

All data taken at 12:00 p.m. EDT

By Steve Stecyk, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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