Federal funds futures remain priced for the Fed to be sidelined for a while, with investors believing the central bank will stick to the following line within the Dec. 16 FOMC statement: "The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
Federal funds futures are priced for the funds rate to trade at around 25 basis points over the next five to six months -- no change in rates. As usual, the market sees a change possible beyond six months from now. This is fairly normal, but the mind-set of "things could well be different a half year from now" is often wrong. Whatever the case, the July fed funds future shows that the market is priced for the possibility of a rate hike occurring six months from now, with odds at roughly 68% for a 25-basis-point hike. For the end of the summer, the market sees at least one hike to 0.50% and about 70% odds of two 25-basis-point hikes to a rate of 0.75%.
As I said, it is fairly normal to see the market look six months ahead and see a change in monetary policy as likely. What often happens, though, is that the market winds up pushing back its expectations further and further (usually because economic data do not support the existing view), although investors still cling to the idea that whenever the change in policy occurs, it will be six months in the future.
P.S. Will you be there when Cramer makes his next move?
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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