There is not much of a likelihood the Federal Reserve will signal the long awaited exit strategy with an increase in the Fed Funds rate at the conclusion of the June Federal Open Markets Committee (FOMC) meeting today.
The Fed’s current easy money stance has been somewhat akin to a Hotel California trade; there are no exits.
The Chicago Board of Trade’s Fed Funds futures illustrate how expectations of an easy money exit strategy continue to get pushed back. The Fed eased a whopping 75 basis points to 3.5% at the beginning of 2008 as we began to learn about the bank solvency crisis and would take the Fed Funds rate to its current 0-0.25% target by the end of that year after the Lehman Brothers bankruptcy confirmed a full blown credit crisis.
Positive economic reports in the first quarter led the market to price in a decent chance of a 25 basis point increase by year end, but beginning in April Fed Funds pushed expectations of tightening further down the road.
The following slides show this transition:
You can see that something changed in April
While back in January Fed Funds priced in a strong chance of an increase by year end, as of June 21 there was only a 14% chance of a rate hike by the December FOMC meeting according to the CME Group "Fed Watch." page.
Last summer the market figured we would be on our way to bringing rates back up by this time.
By the beginning of 2010 the Dow had already retraced half of the move from the all time highs to the March 2009 credit crisis low. We had more than a year of the Fed's zero rate policy and the Fed was talking up the recovery.
Wonder if we will still be searching for that elusive exit strategy a year from today.
