Archived IMT (2008.09.11)

Fed Fed funds futures are now pricing near a 50% chance of an INTEREST RATE CUT before year end, reflecting the sea change in economic fundamentals and market sentiment and in line with our long held calls for such a move. Our rationale has rested on the argument that the heightened weakness on the macroeconomic front (unemployment and consumption) combined with severe credit conditions will overwhelm the inflation priorities of the Federal Reserve, especially as commodity prices resume their declines. We expect the Fed funds rate to drop to 1.50% by year end. But such an easing would only slow down the momentum of the dollar rally rather than reverse it.