This is a discussion on the future direction of the Federal Funds rate, using the Fed Funds Rate Predictor (produced by the Cleveland Fed as a starter.
Submitted: May 13, 2008
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Options on federal funds futures can be analyzed to extract public expectations of future Fed actions. The charts below show what markets believe the most likely outcome of upcoming FOMC meetings will be. The charts are updated every business day and reflect the most recent data released by the Chicago Board of Trade. Probabilities can be estimated with various assumptions, which are described in detail here and in the readme worksheet of the downloadable Excel file. The assumptions used to construct each day's charts are indicated immediately below the pictures.
Updated: August 26, 2008
The chart is also up for the October meeting:
Please feel free to join our just launched interest rate discussion on the BestCashCow forum.
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Comments Received:
80% probability according to this chart that the Fed will stay at 2% at the June meeting. Interesting that this probability has increased over the last week and a half from 70% to 80%. This is consistent with that we are seeing with savings and CD rates, which are no longer declining and are even rising in some cases.
Posted: May 13, 2008
I put up the new chart this morning and what struck me was the increased probability of the Fed Funds rate staying at 2%. Yesterday is was an 80% probability and one day later it has increased to 86-87%. There was also a correspondingly shart drop in the probability of the rate being reduced to 1.75%.
Posted: May 14, 2008
Slight increase today in probability of Fed staying with 2%. Almost 90% probability now. Also slight uptick in probability of drop to 1.5% although it's still below a 10% probability.
Posted: May 15, 2008
Nothing new happening. FOMC minutes did nothing to change probability of staying put on rates at the June meeting. If an increase is to happen it seems like it will happen later in the year.
It does seem though that barring any kind of major surprise, rate cuts are over.
Posted: May 22, 2008
90% chance of staying at 2% in June and 80% chance of staying at 2% in August.
Posted: May 27, 2008
There was a significant change today in the August meeting outcome. The probability of the Fed raising rates by 25 basis points at the August meeting increased from 10% to 20%. As a result, the probability of rates staying at 2% dropped from 76% to 70%.
A better than expected economy and rising inflation is setting the stage for the Fed to begin raising rates. Consider that before locking into any long term CD.
Posted: May 30, 2008
Big movement, especially for August meeting outcomes. The probability of a rate increase to 2.25% has spiked up to 40%. Inflation fears seem to be outweighing concerns of a soft economy. Still an 85% chance rates will stay at 2% in June.
Posted: Jun 10, 2008
For June, the probability of the Fed raising rates to 2.25% has gone from almost 0% several weeks ago to about 25% today.
Looking at August meeting outcomes, the probability of the Fed increasing rates by 50 basis points to 2.50% is now equal to a 25 basis point increase (2.25%).
It looks like the markets believe the Fed is serious about tackling inflation.
Posted: Jun 13, 2008
More movement as the probability of the Fed raising rates at the August meeting to 2.25% is now equal in probability to staying at 2%.
The WSJ posted an article today saying that the Fed was reversing its stance and was more likely to keep rates at 2% in August but the markets don't show that yet. It will be interesting to see what happens over the next couple of weeks.
http://online.wsj.com/article/SB121365941834979141.html?mod=hpp_us_whats_news
It's a lock that the Fed will stay at 2% in June.
Posted: Jun 16, 2008
Major changes over the last couple of days. The momentum we were seeing for a rate increase has vanished and it now looks like markets are increasingly skeptical a rate cut will happen in August. The probability of a rate increase to 2.25% has dropped to 20%, down from 35% just a week ago. It looks like further signs of weakening in the economy - bank write downs, housing numbers, etc. - have spooked the markets. How the Fed balances inflation fears versus recession fears will determine the probabilities. For now, recession fears are winning again.
Posted: Jun 19, 2008
I'm not sure the Fed is going to raise rates at all. I think you'll see the economy weakening further. Here are a few good articles to check out on this:
http://www.dailypfennig.com/
And from Barrons:
http://online.barrons.com/article/SB121395872186691599.html
Posted: Jun 22, 2008
No real changes. Everyone is betting rates will stay at 2% but we'll know for sure at 2:15 tomorrow (Wed, June 25).
Posted: Jun 24, 2008
The Fed did indeed stay at 2% as the markets predicted. Today, we added the probabilities for September. They are all over the place. I haven't seen such a cluster of probabilities since I started following the probabilities. Markets are uncertain although they they believe the highest probability rests with the Fed staying at 2% (almost 40% probability).
Posted: Jun 26, 2008
Probability of holding at 2% in August and September have firmed slightly. The Fed is still straddling the fence between recession and inflation. Interesting to see how this breaks.
Posted: Jul 2, 2008
Barring any unforseen financial crisis, August looks like a lock to stay at 2%. For September, 50% probability of staying at 2% and 25% probability of an increase to 2.25%. The probability of going to 2.25% has actually increased over the last week so the markets still seem to think that inflation concerns will outweigh bank problems and a weak economy.
Posted: Jul 9, 2008
Interesting moves today based on the events of the last week - Freddie and Fannie, Indymac, etc. For August, the probability of staying at 2% is now above 90%. As was mentioned before, this is a lock.
For August, the probability of staying at 2% has increased slightly after taking a dip a week ago. More significantly, the probability of a rate increase to 2.25% has dropped while the probability of rates declining to 1.75% has shot up from 10% to over 20%.
For now economic weakness is winning out over inflation fears in the markets.
Posted: Jul 16, 2008
2% still a lock for August. Brief blip in probability of rates dropping in September is gone. Most likely scenario in September is staying pat at 2%. Not even near collapse of Fannie and Freddie could alter that probability significantly.
Posted: Jul 22, 2008
No real change. 2% still a lock for August. It also looks like the Fed will stay at 2% in September. Chances of a rate cut look very minimal. Interesting that probability of rate increase to 2.50% is now the same as probability of increase to 2.25%. Markets seem to think that increases are more probably than decreases at this point.
Posted: Jul 30, 2008
As expected the Fed stayed at 2%. Betting is that it will continue to do so into September.
Posted: Aug 5, 2008
60% chance and rising the Fed will stay at 2% in September. I put the October chart on and staying at 2% is the highest probability. Bit if a spike in rates going to 2.25% so will be interesting to see how that develops. Stay tuned...
Posted: Aug 6, 2008
2% looks like it's locking in place for both September and October. The decline in energy prices has no doubt reduced the probability of the need for a future rate cut.
Posted: Aug 13, 2008
The markets still think the probability of the Fed raising rates is greater than lowering. 2% looks like an increasing lock for September. There is also an over 60% probability of staying at 2% in October. The next closest probability after that is going to 2.25% (~21%)probability. Only 10% probability of rates dropping to 1.75% in October.
Posted: Aug 19, 2008
The probability of staying at 2% has increased for both September and October. It's at 80% for Sept. and over 70% for October. The Fed has said there next will be to raise rates but that might be in some time.
Posted: Aug 26, 2008
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