Next Fed move could be a rate CUT

Following another round of financial market turbulence, fed fund futures contracts don't see the Federal Reserve raising rates until at least February 2018 and in fact are pricing in a small likelihood of a rate cut.

Diminished expectations for rates come as investors worry that a global slowdown could send the U.S. into a recession this year.

Markets appeared to be in for another rough day Thursday, with stock market indicating the Dow Jones Industrial Average likely to decline 250 points off the open. Government bond yields also slumped, with the benchmark 10-year note hovering around 1.6 percent.

The futures market activity showed results Thursday out of the step with public proclamations from Fed officials, who have said they remain on course for a slow but steady path of rate hikes ahead.

The CME FedWatch tool to measure the probability of rate hikes actually turned negative for the near term Thursday, indicating a -6 percent chance for a March rate hike, a -7 percent change for June and all the way to -14 percent for September. The farthest date out the tool measures, February 2017, indicates a -12 percent chance.

In recent days, Fed officials have discussed the possibility of going to negative interest rates. In congressional testimony Wednesday, Chair Janet Yellen said the Fed last explored the idea of taking the interest paid on banks' excess reserves negative but were unsure of the legality. However, Vice Chair Stanley Fischer in remarks last week said the initial results from negative rates in Europe were encouraging.

The Fed has directed banks, in stress tests to be conducted in the coming months, to model for the possibility of negative short-term Treasury bill rates, though Fed officials stress that it's only a hypothetical scenario.

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