Let's polish up the crystal ball and check what futures markets say on what December will bring for interest rates.
The U.S. Federal Reserve next meets to discuss rates on Dec. 16. Just a few weeks ago, there was a widespread belief that the Fed would not cut further, in part because overnight rates that were well below 1 per cent would pose enormous strains on money markets. The specific worry was U.S. money markets funds would ‘break the buck,' as a combination of low rates of their investments and administrative expenses ate into assets.
Well, the Fed is now expected to be more concerned with kick-starting a moribund economy than helping out money market funds.
Fed funds futures are signaling a 62 per cent chance of a 50 basis point cut in interest rate policy, to 0.50 per cent, at the Dec. 16 meeting. There's a 38 per cent chance the cut is even deeper -- a 75 basis point move. The U.S. government is all but giving money away, as Japan did during its lost decade. Rates this low are an ominous sign.
Bank of Canada governors are scheduled to gather on Dec. 9, and what's known as "BAX/OIS sentiment” is currently showing a 100 per cent probability that interest rates are slashed by 50 basis points, according to a report Thursday from TD Waterhouse. The central bank cut by 25 basis points last month when it pegged overnight rates at 2.25 per cent on Oct. 21. (By the way, for those who have never checked it out, the Bank of Canada has a terrific web site, with all sorts of info for economics geeks.)
