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Wall Street: 100% for a half-point Fed cut

Futures markets price in another deep rate cut after central bank chief Ben Bernanke tells lawmakers the health of the economy is his first priority.

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By David Ellis, CNNMoney.com staff writer

Who do you blame for the mortgage meltdown?
  • Lenders
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WASHINGTON (CNNMoney.com) -- Ben Bernanke didn't tell Congress this week exactly what the Federal Reserve would do next, but the central bank chief certainly left Wall Street with the impression that a half-point cut is a sure thing.

Federal Reserve policymakers are scheduled to meet again on March 18. Right now futures listed on the Chicago Board of Trade indicate that investors are pricing in a 100% chance of a half-point cut and a 32% chance that the Fed will slash interest rates by three-quarters of a percentage point.

"A 50-point cut seems to be a reasonable compromise," said Stuart Hoffman, chief economist at PNC Financial Services. "Any more than that and he will catch some inflation flack."

Bernanke, as part of his semi-annual hearing on the Fed's monetary policy, spent two days testifying in the House and Senate and outlined the trio of challenges facing the Fed: an economy at risk of falling into a recession, topsy-turvy financial markets and the rising risk of inflation.

But it was the health of the U.S. economy that remained his biggest concern. The Fed chief focused on the variety of "downside risks" to the economy, including continued deterioration in the already troubled housing sector as well as the health of the consumer.

His comments, along with more troubling economic numbers issued on Wednesday and Thursday, only firmed up expectations about the Fed's next move. Prior to his testimony, investors were betting that a half point cut was all but certain - futures markets on Monday suggested there was a 94% chance that the Fed would implement a half-point cut.

A half-point cut in March would bring the fed funds rate, which affects rates on a variety of consumer loans including credit cards and mortgages, to 2.5 percent.

Since September, the central bank has steadily lowered interest rates by 2.25 percentage points to help keep the economy from tipping into a recession. In January alone, the Fed instituted two cuts totaling 1.25 points.

April move tricky

The Fed's move at its two-day policy meeting in late April may prove a little more complicated as inflation fears have started to gain more attention lately.

Prices at both the consumer and wholesale level climbed more than expected during the month of January, even when accounting for volatile food and energy prices.

Even the Federal Reserve chief himself acknowledged the threat, warning lawmakers that efforts to stimulate the economy could become complicated if inflation failed to moderate.

That is proving tough however as a weakened dollar and the prices of key commodities, particularly crude oil, continues to hover near record highs.

"Based on [Bernanke's] testimony, I would say he will start to get a bit more cautious in his rate cuts after cutting again at the March 18 meeting," said David Jones, president of consulting firm DMJ Advisors who formerly served as a chief economist at a bond house on Wall Street.

In fact, experts like PNC's Hoffman argue that unless the economy is clearly in a recession by the Fed's April meeting, a rate cut in March might be the last for some time.

"I think there's a case to be made that the Fed may say, 'Let's take a breather right now and see what is happening,' " said Hoffman. To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.