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Rate Cuts Seen More Likely Following Jobs Report
By: Reuters | 04 Jan 2008 | 09:52 AM ET
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The odds of future interest rate cuts increased Friday after the release of weaker-than-expected December jobs data.

February fed funds futures rose 0.03 points to 96.115, implying a 73% chance that the Federal Reserve will lower its target for overnight rates by 50 basis points to 3.75% after its next policy setting meeting in late January (Jan. 29/30).

Federal Reserve
The Federal Reserve headquarters in Washington, DC.

The U.S. Labor Department said December nonfarm payrolls increased by 18,000, well below the median estimate of analysts surveyed by IFR Markets of a 70,000 rise. The unemployment rate increased to 5% vs. expectations of 4.8%.

Just prior to the release of the jobs data, the odds of a 50 basis point rate cut were down to 65% from 67% late Thursday.

Earlier this week, the Fed released minutes of its December meeting, which showed policymakers worried that a credit crunch could sharply brake economic growth and require big interest rate cuts.

"Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit;
such an adverse development could require a substantial further easing of policy," the minutes said.

At the same time, members of the Fed's rate-setting Federal Open Market Committee realized that financial market conditions might improve more rapidly than they expected, which would make it appropriate to raise borrowing costs, reversing earlier cuts.

The Fed cut rates by a quarter-percentage point to 4.25 percent at the meeting.

Risks to growth had risen since their last meeting in large part due to deteriorating credit markets, the Fed said.

Even so, the policy-makers weighed the lagged impact of cumulative interest rate cuts, and a strong labor market, which suggested the economy retained some forward momentum. Overnight, interbank borrowing costs stood at 5.25 percent when the Fed began trimming borrowing costs in September.

"Members also recognized that financial market conditions might improve more rapidly than members expected, in which case a reversal of some of the rate cuts might become appropriate," the minutes said.

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