expectations for more fed rate cuts have increased today, with the market priced for high odds of a 75-basis-point cut occurring at the 3/18 fomc meeting. The market is priced for 76% odds of a 75-basis-point cut at the march meeting, up from 74% odds monday and 0% odds a week ago.
for the 4/30 meeting, the market is priced for 100% odds of a cumulative 100 basis points in cuts (a 2% funds rate) and 8% odds of a cumulative 125 basis points in cuts, up from 6% odds monday and 82% odds of just 75 basis points in cuts a week ago.
for the june 25 fomc meeting, the market is priced for 100% odds of a cumulative 100 basis points in cuts and 68% odds of 125 basis points in cuts (a 1.75% funds rate).
for the end of 2008, the market is priced for a funds rate of 1.75%.
in other words, the fed is expected to cut rates sharply in the first half of the year and then stop cutting.
during bernanke's speech today in florida, he gave a set of weak proposals, which he himself said there were objections to.
he pushed the idea that banks, which have been experiencing losses of as much as 50% of the principal mortgage balances owed to them by individual homeowners, should consider reducing the principal balances for distressed homeowners. bernanke recognizes this is not a popular idea in the banking system, to say the least.
in an environment of falling house prices, however, whether a reduction in the interest rate is preferable to a principal write-down is not immediately clear. both types of modification involve a concession of payments, are susceptible to additional pressures to write down again, and result in the same payments to the lender if the mortgage pays to maturity. the fact that most mortgages terminate before maturity either by prepayment or default may favor an interest rate reduction. bernanke's other ideas are mostly small, incremental ones. he's in over his head.