Determining When Higher Rates Are Coming

This week’s FOMC statement and ‘less-bad’ recent economic data brought up an interesting notion now that the Federal Reserve seems to be at least a bit less negative on the economy.  Ditto on the prospects for a recovery and for a balance between inflation and deflation.  You can’t quite interpret the data nor the official statement as ‘rosy,’ but it also sounds like the Fed governors have been able to get off the anti-depressants since their last meeting.  The question comes down to exactly when the FOMC will get off this ‘targeted Fed Funds rate’ in a 0.00% to 0.25% range and when we will have a real fed funds rate again that is higher.  A look at the CBOT Fed Fund Futures signals that this policy will probably go to 0.25% after the summer and there may be a very slight chance that this could be near 0.50% by the end of the year.

If you look at the Fed Fund Futures targets below (mid-Thursday pricing, not closing prices), you have to go out to October before the pricing of these gets to where most traders would interpret the odds of a 0.25% rate having over a 100% chance being priced in.  This analysis is also up for grabs and technically subject to interpretation because some traders have their own models based loosely on this data that takes other factors into account.

And when to determine a 0.50% implied Fed Funds rate having ‘odds of over 100%,’ that does not come into play until after February 2010.  Again, while this is very simple math used to determine that rate there are many traders who only use this up for one factor in their own models.  And of course there is always the added notion that the farther you go out the curve the less and less reliable and less and less accurate these numbers could be.

MONTH  PRICE
09May 99.8200
09Jun 99.8050
09Jul 99.7950
09Aug 99.7650
09Sep 99.7500
09Oct 99.7200
09Nov 99.6850
09Dec 99.6600
10Jan 99.6200
10Feb 99.5350
10Mar 99.4600
10Apr 99.3700
10May 99.2100
10Jun 99.1050

While this at least indicates that there will be a formal higher rate than what we have seen as a 0.00% to 0.25% target range for Fed Funds, the good news is that even all the way out to June of 2010 there is not a market-perceived certainty that we’ll be at 1.00% on the Fed Funds target rate.

Another thing to consider is that this is based intra-day and will change with most markets moves or any day that there is big economic data that moves the markets.  We check this periodically at the CBOT site.

We have our own thoughts on how using this data can be highly subjective and there is also the notion that ‘opinions’ get thrown into the mix.  If you’ve followed us for a while you know we have plenty of those opinions of our own.