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.
By Daniel Kruger
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.
Traders in options anticipate lower borrowing costs than economists or futures contracts, the most widely used barometer of Fed policy, amid increasing concerns about mortgage defaults. Futures show rates will fall to 4.75 percent by year-end and economists expect 5 percent, according to the median in a Bloomberg survey 73 forecasters from March 1 to March 7.
``The fear is it spills into the economy, it spills into the banking system and creates a credit crisis,'' said David Robin, an interest-rate strategist in New York who helps manage options trading for institutional clients at Fimat USA LLC, a unit of Societe Generale Group.
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.
more