March 19 (Bloomberg) -- Options traders are starting to say the Federal Reserve may cut interest rates three times this year as the housing slump threatens the economy's growth.
Options on Federal Fund futures at the Chicago Board of Trade show a 24 percent likelihood the central bank will lower its target rate for overnight loans to 4.5 percent from the current 5.25 percent. Just seven weeks ago, options prices suggested no chance of that large a reduction this year.
Options, among the cheapest way to bet on rates, may provide a more accurate picture than futures, according to a 2005 study the Federal Reserve Bank of Cleveland.
This is starting to play into the rate cut scenario. Inflation is a problem, but if the Feds start weighing risk, my guess is they might do a shift and express more concerns about the economy. The key is how we lead up to such an event. Tonight's futures will tell us very quickly how much selling, if any, we are going to have on Monday.
Options on Federal Fund futures at the Chicago Board of Trade show a 24 percent likelihood the central bank will lower its target rate for overnight loans to 4.5 percent from the current 5.25 percent. Just seven weeks ago, options prices suggested no chance of that large a reduction this year.
Options, among the cheapest way to bet on rates, may provide a more accurate picture than futures, according to a 2005 study the Federal Reserve Bank of Cleveland.
This is starting to play into the rate cut scenario. Inflation is a problem, but if the Feds start weighing risk, my guess is they might do a shift and express more concerns about the economy. The key is how we lead up to such an event. Tonight's futures will tell us very quickly how much selling, if any, we are going to have on Monday.
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