Fed Expected to Raise Rates??Possibly in 2015?
Today’s Spotlight Market
For those traders looking for a way to control a position based on any potential changes in short-term interest rates due to a shift in the Federal Reserve?s monetary policy, the CME Group offers trading in the 30-Day Fed Funds futures. This contract is designed to show the current market outlook for the average daily Fed Funds effective rate each month going out 3 years into the future. Market participants, according to Fed Fund futures prices on Thursday, were calculating a 61% chance of a 0.25 interest rate hike following the June 17th 2015 FOMC meeting. This was the earliest time frame where the potential probability of a rate hike was over 50%.
Financial futures traders have waited all month for the release of the statement following the conclusion of the March FOMC meeting this past Wednesday to gauge the temperament of Fed officials as to the extent of further tapering of Bond purchases, as well as a look into a possible start date when short-term interest rates will be raised. As expected, the Fed announced that its Bond purchasing program will be decreased by $10 billion per month to $55 billion. It is believed that the Fed will continue to slowly lower the amount of Bond purchases throughout the year, with a possible end date in the 4th quarter of 2014. What really peaked traders? interest was in the projections from FOMC voting members relating to where interest rates will be in the next several years.?
Although the statement was clear that the Fed would keep short-term rates at below ?normal? levels for an extended period, even if employment and inflation levels rise, a majority of Fed officials saw the Fed Funds rate at or below 1% by the end of 2015, and 12 of 16 saw the Fed Funds rate at 2% or above by the end of 2016. This was viewed by analysts as a more ?hawkish? stance on interest rates by the Fed and sparked an upward revision by traders on the timing of any short-term interest rate increase.?
Fed Fund futures are now forecasting the likelihood of a 0.25 rate increase towards the end of the 2nd quarter of 2015, with a 0.94% likelihood by the end of 2015.? Fed officials continued to blame sluggish economic activity so far in the first quarter of the year on harsh weather conditions this winter, but the expectation is still for GDP growth to range between 2.8 and 3% at the end of 2014. However, should economic growth continue to struggle, without Mother Nature to blame it remains to be seen if the Fed will be willing to adjust their projection for interest rates or even resume Bond purchases if necessary now that the ?taper? is gaining momentum.
Technical Notes? -? View Today’s Chart
This morning we are going to take a look at the term structure chart for Fed Fund futures. Notice the rate of decline begins to steepen starting with the February 2015 futures contract, where the probability of a 0.25% rate hike is near 25%.? Looking out 12 months from this date, we note the market pricing-in 2 or 3 additional 0.25 rate hikes by the end of the 1st quarter of 2016. However, should economic data continue to show the U.S. economy struggling to gain positive momentum, we could see traders begin to postpone their expectations relating to when the Fed will finally raise rates, which could produce a flattening of the Fed Funds rate curve.
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