by Calculated Risk on 7/16/2008 05:27:00 PM

Reading the Fed minutes today, it appears that as of the last FOMC meeting in June, most FOMC members were once again missing the downside risks to the economy. Chairman Bernanke somewhat corrected that mistake in his testimony over the last two days as he acknowledged the "significant downside risks to the outlook for growth".

As of yesterday - before the stock market rally today - market participants were expecting the Fed to hold rates steady at 2.0% through September, and a rate cut is now more likely (in their view) than a rate hike by the September meeting.

Click on graph for larger image in new window.

This graph from the Cleveland Fed shows the implied probability of what Fed Funds futures market participants expect the most likely outcome to be at the Fed meeting in September.

I also think the Fed will hold rates steady - probably through the end of the year.