Fed Fund Rate Predictions

Courtesy the Cleveland Fed. Note that this is as of time, the Fed fund futures market says there is zero probability of a 25 basis point reduction. A 50 basis point cut has 50% odds.

Note this chart is dated March 6. and therefore does not reflect the impact of the announcement of the increase in the Term Auction Facility.

David Leonhardt of the New York Times reports that later trading showed expectations shifted to a deeper cut:

Traders became even more confident, based on the price of futures contracts, that the Fed would cut its benchmark interest rate three-quarters of a point, to 2.25 percent, when policy makers meet on March 18.

Another Times article by Edmund Andrews points out the Fed lacks effective remedies:

The Fed’s problem is that its main weapons against a downturn — lower interest rates and easier money — are ill suited to a crisis that stems from collapsing confidence about credit quality.

Even though the central bank sharply cut short-term interest rates twice in January and clearly signaled that it would cut them again on March 18, rates for home mortgages have risen and rates for many forms of commercial loans have jumped sharply.

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  1. Anonymous

    Why are interest rates on 30-year fixed-rate mortgages rising even as the Federal Reserve slashes interest rates and yields on Treasury bonds fall?
    The answer is that the mortgage market is short of roughly $1 trillion in capital, according to Paul Miller, an analyst at Friedman, Billings, Ramsey.
    The modern mortgage market works with lots of leverage, or borrowed money. Investors, including hedge funds and mortgage real estate investment trusts, buy mortgage securities, but finance a lot of their purchases with this leverage.
    FBR’s Miller estimates that $11 trillion of outstanding U.S. mortgage debt is supported with roughly $587 billion of equity. That’s a leverage ratio of 19 to one.


  2. doc holiday

    I found an old post of mine at Yahoo, and wanted to share it; it’s from Moody’s and it always stood out for me as a nice example of how it seemed that MCO was not ready or able to rate synthetic derivatives, but they wanted the market share and jumped in anyway (IMHO)!

    Reporting Standards In The Works The Commercial Mortgage Securities Association, the trade group that represents the CMBS market, launched an initiative through which it will develop reporting standards for CDOs, similar to the Investor Reporting Package standards it developed for the CMBS market several years ago. The CMSA is hoping that the voluntary guidelines will be up and ready to go within in the next 12-18 months, said Kent Born, president of the CMSA. The standards will allow investors to compare bonds across different transactions. With the growth in the CDO market, the CMSA has been having mini-CDO conferences around its twice yearly conventions. The group is also broadening its focus to expand from generic CMBS to all real estate finance, including CDOs and CMBS derivatives. It is also planning to increase its educational sessions on CDOs and the burgeoning credit derivatives market because education on them is a key to the industry’s growth, said Margie Custis, managing director of Principal Global Investors. At a conference earlier this year, Kim Diamond, who heads the CMBS group at Standard & Poor’s, noted that it is tough for the rating agencies to keep pace with CDO technology. She said that the agency is working to adapt its current model to accommodate innovations in the sector andsaid that transparency is the key to all of the CDO models.“We can’t effectively accommodate concentrations right now,” she said.

  3. doc holiday

    oops, I said MCO, but this was S&P, but IMHO, every rating agency out there is involved in providing false and misleading information through model manipulation which fails to reflect risk! If that aint true, then what happened to the last few trillion that just got burned?

  4. doc holiday

    OT, but more background for MCO on ratings growth; I was going back over some MBIA stuff and thought this and ll the ratings trash was work another look?


    The repackaging of financial assets has had a profound effect on the
    fixed-income markets. New patterns of securitization are expected to emerge in
    the next decade. Although the bulk of assets securitized in the past five years
    have been consumer assets owned by banks, commercial assets – principally
    commercial mortgages, term receivables and corporate obligations – are now
    increasingly being securitized. Securitization has evolved into a strategic
    corporate finance tool in North America, Europe and Japan, and is evolving
    elsewhere internationally. Ongoing global development of non-traditional
    financial instruments, especially credit derivatives, has accelerated in recent
    years. Increasingly complex collateralized debt obligations (“CDO”s) have been
    introduced, which should continue to support growth. Moody’s has introduced new
    services enabling investors to monitor the performance of their investments in
    structured finance, covering asset-backed finance, commercial mortgage finance,
    residential mortgage finance and credit derivatives.

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