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(CEP News) - Fed Funds futures are fully priced in for a 50bp rate cut by the year-end FOMC meeting as the Fed's liquidity measures continue to undermine their ability to manage the basic interest rate in the economy.
However, traders are factoring in a 16% chance for a 75bp rate reduction, down from 32% yesterday. Philadelphia Fed President Charles Plosser said that the Federal Reserve will address the Fed funds target issue. The excess liquidity that the Fed put into the system has had the unintended effect of lowering the rate below the Fed's target of 1% Chief economist Sherry Cooper at BMO Capital Markets writes that the Fed has to resolve the problem it is having with the target rate at the next FOMC meeting. "With rates likely to be cut to a mere 50 basis points and the Fed having difficulty keeping the effective fed funds rate as high as the target, additional unconventional actions will be discussed and implemented, possibly as soon as the next policy statement," Cooper wrote. Economists at the Goldman Sachs expect that the Fed will have to resort to unconventional methods to stimulate the economy. "We continue to expect the FOMC to cut the federal funds rate target by 50 basis points (bp), to 50bp, at its next meeting on December 16, if not before," they wrote. "Although a subsequent rate cut to zero is not out of the question, we think that the committee will turn to unconventional policy tools more openly to remain aggressive in attempting to support the economy and financial markets." RBC Fixed Income Strategist T.J. Marta expects the Fed will cut rates to zero as disinflation threatens the economy. "The disinflationary, perhaps soon to be deflationary, environment, suggests the Fed will cut the target federal funds rate further towards zero and keep rates at rock bottom levels through 2009," wrote Marta. All data taken at 3:00 p.m. EST By Steve Stecyk,
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, edited by Nancy Girgis,
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