Futures markets are pricing in a huge cut of 100 basis points in United States interest rates by the Federal Reserve by the end of June, with half of them to come before the end of March. 'What is going on is that as the US economy is slowing the market is getting more and more excited about the possibility of rate cuts,' said Paul Brain, a fixed-income fund manager at Investec Asset Management. The Federal funds rate, the rate at which the Fed lends money to institutions, is 6.5 per cent. However, Fed funds futures contracts which expire at the end of March had priced in an interest rate of 6.07 per cent and those expiring in June just 5.55 per cent, Mr Brain said. In July, three-month futures contracts were pricing in 6.8 per cent with expectations of further Fed rate rises to rein in the US economy which was then galloping along at 5.6 per cent annual growth in the second quarter. As recently as last month, Fed futures contracts were yielding 6.45 per cent, suggesting the market had not made up its mind where rates were heading due to conflicting economic data. With an almost daily diet of dire numbers in recent weeks, markets are convinced the Fed and its chairman Alan Greenspan will slash rates. Drastic changes have also been seen in US dollar-euro futures rates which some traders view as a more reliable guide than Fed fund futures because they are more heavily traded. Between December 19 and 22 the rate dropped from 6.09 per cent to 5.855 per cent as markets reacted to figures showing the decline in US industrial production had accelerated last month from October while initial jobless claims had jumped. 'Movements like this are quite significant, they only happen a few times a year,' a Hong Kong-based bond fund manager said. US rate cuts would be a big boost to Hong Kong as the dollar peg would cause them to be mirrored in the territory, boosting stock and property markets and consumer spending. Expectations of lower rates have been good news for Hong Kong bonds. The HSBC Hong Kong Dollar Bond Index is up 1.6 per cent for the month to yesterday, said the manager, giving an annualised return of 19.2 per cent. But while markets were excited about what the Fed might do, they might be getting ahead of themselves, Mr Brain said. If the Fed were to make its first rate cut at its January 30-31 meeting as the markets expected, Mr Greenspan might be bringing about only a cyclical, not a structural, slowdown, he said. 'If he were to stabilise stocks and stabilise the economy too soon, then what has he achieved?' Instead Mr Greenspan might delay making a cut until March. That would cool the US housing market, cause corporates to cut back investment plans and increase the rate of unemployment which would prevent the tight labour market stoking inflation. But using interest rates as a blunt instrument to create joblessness was a dangerous game and could do much damage. 'If you shoot a reindeer with a machine gun, you are going to kill it but what is left is not too sure,' Mr Brain said. He expected the US economy to slip into a technical recession of two quarters of negative growth in the first half of next year before 50 basis points of rate cuts put it back on a positive growth path in the second half. Investec expects US growth of 2.5 per cent for next year. 'But that is more likely to be revised down than up,' Mr Brain said.