It’s been a long time since there was anything worth looking at in the Fed Funds market. And there’s still no action, but as the environment seems to continue to normalize it’s worth checking back in on Fed Funds futures to get a sense of what the futures are forecasting for Fed action.
The data below is the Fed Funds rate implied by 30 day Fed Fund futures at the CME (I didn’t factor in any time value of money or normalize the curve in any way). The contracts settle based on the average Fed Funds rate in the month of the contract. For example the February 2016 contract implies that the Fed Funds rate is projected to be 59 bps on average in that month (compared to ~13bps currently). Right now the curve looks to be forecasting an increasing probability of higher rates starting in mid 2014. That would roughly coincide with a 6.5% unemployment rate per the Fed’s current policy.
If Gold’s collapse this week is an indication that investors are not as fearful as they once were, it’s interesting that bonds have diverged and rates haven’t risen at all. Obviously Fed Funds wouldn’t go anywhere until the Fed tells it to, but one might expect that the five year note might start to price in a similar sentiment. After all a normalized environment includes normalized interest rates, doesn’t it?