The Violent Femmes and Fed Policy
JACKSON HOLE, Wyo. -- And today we calculate the odds of a
November rate hike.
fed funds rate
currently sits at 5.25%.
Therefore, if the
decides to raise it to 5.50% at the conclusion of its meeting on the 16th, the funds rate would average 5.36% for the month of November.
12 days (do not include weekends) @ 5.25 = 63.
10 days @ 5.50 = 55.
63 + 55 = 118. 118/22 = 5.36%.
And note that that projected 5.36% funds rate stands 11 basis points above the current funds rate.
Current price of
November contract = 94.675.
Implied funds rate of November contract (100 - current price) = 5.325%.
Amount of tightening currently priced in (implied funds rate - target funds rate) = 5.325% - 5.25% = 7.5 basis points.
Seven-point-five basis points (amount of tightening currently priced in) divided by 11 basis points (amount of full tightening as explained above) equals 68% -- the fed funds futures market currently discounts a quarter-point November 16 hike to the tune of 68%.
In other words, if you were forced to bet on the outcome of next month's meeting today, you'd be wise to put money on a hike.
Two notes on the calculation presented here.
(a) It's easy to track by yourself.
Every day you can go and look where the November contract
settles and calculate an up-to-the minute tightening probability. The 11-basis-point denominator remains the same -- only the numerator changes with movements in the funds contract -- and anything above 50% points to a hike.
(b) It's frightfully accurate.
Jim Bianco of
Bianco Research notes that this calculation, when using the price at which the futures contract settles on the Friday before a Fed meeting, has correctly predicted central-bank action for 39 of the 46 FOMC powwows back to January 1994.
Stop all the clocks; prevent the dog from barking with a juicy bone; ignore the economists; pay no mind to the strategists.
Heed fed funds futures, for they are the keenest forecasters around.
The email address on the
columns has changed. Here is the correct one:
Thanks for all the kind notes yesterday.
And I guess I need to say this one more time.
I draw on economic relationships past and economic numbers present to make reasonable guesses as to economic likelihoods future.
Why anyone expects every one of those guesses to be right -- and why anyone is shocked when some of them aren't -- is beyond me.
Yes. I am extremely critical of some other guesses -- because those guesses almost always fail the common sense test (and usually fail any of a number of others) -- and I tell you precisely why. And yes. I am most forceful about my guesses -- because there are already enough rah-rah, say-nothing, hem-hawing, on-the-one-hand-on-the-other-hand sissy-salesman economists to go around.
You will get an opinion when you come here.
And you know what?
You by no means have to agree with it.
You're perfectly free to look at the hard data I present -- the history and the relationships and the numbers -- and form your own opinions about the future. You're free to look at the same things I'm looking at and come to conclusions that don't at all square with mine.
I mean don't get me wrong. I like it when you agree with me. I do. It makes my tummy tingly. It makes me all warm inside.
But hey. I swear I
predicting certain things. I
admit to being an idiot. I
concede that there isn't anything terribly special going on here. I
tell you that the column is stupid.
I mean cmon already. It ain't like yall ain't been warned.
The readers who get the most out of this column take what I report about economic relationships past and economic numbers present and use them to come to their own conclusions about economic likelihoods future -- likelihoods future that might or might not agree with mine.
Now on with the show.
Worst possible outcome?