Fed Watching

The Federal Reserve has incrementally lowered short-term rates 449 basis points since 2000, from 6.24% to 1.75%. Third quarter economic indicators remain mixed, suggesting continued weakness in the US economy, and reducing the likelihood of a significant turnaround until 2004. As a result, the Fed is no more likely to raise short-term rates next year than it was this year. In fact, based on recent Treasury market activity, the likelihood of the Fed easing short-term rates by November is increasing. On September 24, 2002, yields on US Treasuries reached their forty-year lows. Moreover, Fed Funds futures contracts, viewed as an indication of future interest rate moves, suggested an 18% chance of the Fed reducing its target rate again in October, thereby preempting the next scheduled FOMC meeting in November. Not only will the Fed not increase short-term rates in November, it may actually reduce them before then.