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(CEP News)- In a day that saw volatile shifts in equity markets and the Fed's announcement of additional liquidity measures, markets are now pricing in a 40% chance that the Fed funds rate will be slashed by 75 bps points at the meeting scheduled for Oct. 29.
Markets are fully priced in that that Fed, at a minimum, will drop the fed funds rate to 1.50% from 2.0%. The big story of the day was the massive selloff in global equity markets on fears that the credit crisis will spark a global recession, or possibly even a depression, according to some economists. The Dow Jones plunged more than 800 points before staging a small rally at the end of the day to close down 340 points. Early Monday morning, in a bid to reestablish credit markets and buoy the economy, the Federal Reserve announced that it will be increasing the size of term facility auctions and that it will begin paying interest on required and excess bank reserves. Economists at Goldman Sachs said that the Fed's ability to pay interest rates allows the Fed to expand lending without having to resort to rate cuts. "The ability to pay interest on reserves is important because it allows the Fed to expand its balance sheet without driving the fed funds rate to zero," economists at Goldman Sachs wrote. "This allows the Fed to increase the amount of liquidity it provides to the system without affecting the main tool of monetary policy." Economists from First Trust Advisors think it's time for aggressive monetary policy, "[T]he Fed must cut interest rates again. We suggest an immediate cut of 100 basis points, which would push the Federal Funds Rate back to 1%, from its current level of 2%," wrote economists from First Trust Advisors. "Cutting by 25 basis points or even 50 bps at a time would leave the market wanting more, so we suggest some shock and awe from the Fed." For the Dec. 16 meeting, markets remain fully priced in for a 50bp rate cut. In addition, the implied probability for 100bp rate cut has increased to 10.9% from 4.9%, while a 75bp rate cut has declined to 43.7% from 58%, a day ago. By Steve Stecyk,
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