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Federal Reserve Continues Chasing Bond Market




The Federal Reserve continues to play catch up with the bond market. But with each successive rate cut, the fixed income market continues to stay one step ahead.

We still have an almost 150 basis point gap between the "risk free rate" (90 day Treasury Bills) and the intended federal funds rate - the blue line represents the most recent Fed rate, from mid 2006 to present:

3 month T-Bill november 2007

Which is why I continue to believe, as I did months ago, that the Fed will cut rates before the new year. It may demolish the dollar, but they don't really have a choice.

Something has to give and at the moment, the sacrificial lamb is the once mighty greenback.

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5 Responses to “Federal Reserve Continues Chasing Bond Market”  

  1. 1 primorec

    Hi,

    according to the FED funds futures the 0.25 cut is already expected, even more. there is also a slight probability of further rate cut.

    http://www.cbot.com/cbot/pub/page/0,3181,1563,00.html

    my commentary point to your last part about the crushing of the dollar.

    btw, continue with your work, I love your comments about the market.

  2. 2 Babak

    primorec,
    Thanks for the link, unless I'm mistaken, we now have more than a 50% chance for a 25 bp and almost 30% for 50 bp cut.
    and thanks for the kind words :-)

  3. 3 primorec

    I don˘t think so;)
    The 25 bp cut is 100%, with slight chance of additional 25bp cut

    You can help yourself with this site:
    http://www.bluechippick.com/calculators/fedcalc.php

  4. 4 Babak

    primorec,
    thanks for the link - doesn't it depend on the methodology and the inherent assumptions?

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