Saturday, December 16, 2006

Fed Funds Forecast

From the CBOT trading for Federal Funds futures contracts, speculators are betting on future Fed-funds target rate decreases, and we can therefore determine the following forecasts for the fed-funds target rate in 2007:

Percent chance that the Fed funds rate will be 5.0% by:
March 2007: 4%
April 2007: 12%
May 2007: 30%
June 2007: 42%
July 2007: 74%
August 2007: 100%

Percent chance that the Fed funds rate will be 4.75% by:
August 2007: 8%
September 2007: 28%
October 2007: 50%
November 2007: 86%
December 2007: 100%

Percent chance that the Fed funds rate will be 4.5% by:
December 2007: 12%

Bottom line: Futures trading predicts a 100% chance of two rate-cuts by the Fed in 2007 to 5.0% by August and then 4.75% by December, and a 12% chance of three rate cuts, to 4.5% by next December.

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