The already complicated economic and bureaucratic circumstances for Wednesday’s Federal Reserve decision were further disturbed when Saudi oil facilities were attacked over the weekend throwing the world oil market into turmoil and casting a pall over the global economy.
The treasury futures market is still heavily weighted towards a lower fed funds rate by the end of the year but the timing has changed substantially.
Last month the futures were rating the chance of a second 25 basis point cut at Wednesday’s meeting at over 90%. As of this writing there is a bare 50.4% majority favoring no change and 49.6% behind a 0.25% decrease.
At the final FOMC for this year on December 11th the odds for still being at the current 2.25% upper target have risen to 15.9% with 40.7% for a single reduction, 34.1% for two and 9.2% for three.
The drop to even odds for Wednesday’s FOMC is due to two factors. The economy has slowed this year but there is no sense in the statistics that it is headed for a slump. The salient fact behind the drop in GDP is the pullback in business investment, a development tied to a specific situation, the trade dispute with China. Settle or ameliorate that and business spending and GDP will recover. None of the traditional indicators, employment, wages, labor force participation, initial jobless claims point to a general slowdown in economic growth.
Reference: FX Street
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