6 years is enough

October 28, 2014 08:26 PM

The argument going into today’s Federal Reserve FOMC meeting is whether or not the FOMC continues to use the “extended period of time” language regarding keeping Fed Funds extremely accommodative. The argument is pretty silly. As we pointed out several times, the Fed could raise rates a couple of percent and it would still qualify as extremely accommodative.

Fed Chair Janet Yellen in her first press conference surprised some folks by stating the Fed could raise the Fed Funds rate as soon as six months after the end of QE3. By my calculations that means the earliest possible time the Fed could raise rates is the April 28-29, 2015 FOMC meeting. Of course, Yellen was responded to a specific question so we should take that to mean that if everything goes great that would probably be the earliest the Fed would act and that would not be affected pro or con by any change in language. Prior to the October sell-off the Fed Funds futures market priced in around a 50/50 chance the Fed would raise rates at its mid-June or late July 2015 meeting (see July ’15 Fed Funds, below).

The sell-off caused Fed Funds to rise and the market changed its view of Fed activity. Instead of a 50/50 chance of an increase by mid-year and a certainty of a 25-basis increase by September 2015, the market priced in a near-certain likelihood of a 25-basis point increase by the end of 2015 (see chart).

The odd thing we see with Fed Fund futures is that although equity markets recovered nearly all of the ground lost in October, Fed Fund futures have not receded. In a sense the market is saying the damage was done and we now expect the Fed to wait until the 4th quarter of 2015 to raise rates. It will be interesting to see if the Fed minutes, released later today,  address the recent equity volatility and how Fed Fund futures react to it.


About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.