The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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August 01, 2005

No Surprises In This Week's Funds Rate Probabilities

Last week's GDP report for the second quarter and durable goods report for June just reinforced the trend that has been apparent for some time: The market expects 25 basis point increments in the federal funds rate as far as options on federal funds futures can see.  The calculations, via the methodology of John Carlson, Ben Craig, and Will Mellick, flawlessly compiled and presented in all of their graphical glory by Erkin Sahinoz:



Here's the data...

Download october_pdfs_080105.xls

Download November.xls

... and a PowerPoint presentation with a couple of extra pictures based on the November contract:

Download imp_pdf_slides_for_blog_072905.ppt

... and a simple Excel program illustrating the methodology, courtesy of Will Mellick:

Download ExampleCalculations.xls

UPDATE: John Irons reminds us of the not-so-good news in the GDP report. James Hamilton does the forward looking analysis and concludes, like the market apparently, that

... the economy appears to be chugging along nicely, though the overall effect of the new figures, including the historical revisions, would be to make an objective observer ever so slightly more bearish than he or she might have been before seeing the numbers.

Jim provides lots and lots of links to other blogger-chatter as well.

August 1, 2005 in Fed Funds Futures | Permalink


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» Further thoughts about the latest economic statistics from Econbrowser

I've had a little more time to ponder the meaning of some of the economic data released last week, and here's what I've come up with.

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Tracked on Aug 1, 2005 7:56:37 PM

» When should we worry about the yield curve? from Econbrowser

The slope of the yield curve is likely to become an increasingly bearish indicator as this year progresses, and recent changes in the calculation of the index of leading economic indicators should not be interpreted as in any way denying that fact.

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Tracked on Aug 4, 2005 11:40:21 PM

» CBOT Fed Watch - August 5 Market Close from Economist's View
..,according to the CBOT 30-Day Federal Funds futures contract, there is a 100% chance the target rate will increase .25% to 3.50%, and a 6% chance it will increase an additional .25% to 3.75%... [Read More]

Tracked on Aug 7, 2005 4:44:35 AM

» When should we worry about the yield curve? from Econbrowser
The slope of the yield curve is likely to become an increasingly bearish indicator as this year progresses, and recent changes in the calculation of the index of leading economic indicators should not be interpreted as in any way denying that fact. [Read More]

Tracked on Jan 6, 2006 9:03:44 PM


The interest rate condrudrum is easily explained To understand Mr. Greenspan's logic and approach to interest rates, it is important to appreciate the implications of the Congressional Budget Office's GDP projections for the fiscal out-years for the United States. At a compounded real GDP growth rate of 3.7 percent the real GDP grows about 20 percent every five years. That 3.7 per cent growth rate is roughly what the CBO has projected as an average for the out-years of 2004-2010. Extrapolating from the historically aberrant past 50 years of complete and continuous positive performance of US GDP growth, the CBO has used these anomalous long term average GDP growth rates to construct very similar linear projections for future years. (During the 150 years prior to 1947 the number of years with declining US GDP's roughly equaled the number of years with growing GDP's)

All CBO projections of future governmental tax receipts and disbursements of discretionary and nondiscretionary spending are premised on a linear continuation of this average or near average past GDP growth rate performance. From 1962 total federal annual outlays have been confined to a very narrow percentage of the real GDP - from 17.5-23 percent with the majority of years within a 4 percent band from 18-22 percent. Even social security during the next forty years will do adequately well- if - if GDP growth remains within the CBO projected targets. The whole house of cards, dependent upon the linearity of continued GDP growth, is up against the 70 year cycle of consumer saturation macroeconomics, the second such 70 year cycle for the Second Great Fractal starting in 1858.

In the decision making process to raise or lower fed fund rates and thereby, interest rates, Mr. Greenspan's primary focus exactly parallels the CBO's targeted GDP growth. Without maintaining ongoing growth, the whole system unwinds necessitating larger and larger, and finally impossible, percentages of the GDP to be consumed in taxation or additional federal borrowing to maintain entitlement programs and essential discretionary spending such as for defense. Against this primary focus is Mr. Greenspan's real understanding that irrationally-too-low or reasonably-low-too-long interest rates leads to exuberance in new speculative asset arenas, invariably culminating in collapse. Prospectively from the vantage point of the Second Great Fractal evolution, there is really no 'just the right way or amount' for the Fed to cook the interest rate porridge to escape the consequences of the current global overcapacity and worldwide consumer forward consumption.

It is important to recollect that the CBO has been incredibly wrong in the recent past with its use of linear GDP projections. The euphoric trillion dollar budget surpluses predicted in the late nineties by the CBO were turned inside out and upside down into massive federal deficits with the implosion of the NASDAQ asset bubble. Enter that inevitable collapse. With the high tech 32 month slow motion crash in 2000, real GDP growth contracted to about .4-.5 percent in 2001, 1.6 percent in 2002, and 2.7 percent in 2003 - all substantially below the 3.7 percent desired equilibrium level. With the Federal Reserve's implementation of a rapid lowering of fed fund rates, the incentivised US consumer stepped up to the plate and borrowed his and her way to a 2004 real GDP growth of 4.2 percent. Compare this scenario with the 45 percent decrease in nominal GDP from its high of 103.5 billion dollars in 1929 to 56 billion in 1933, non-coincidentally 32 months later, and Mr. Greenspan will, at the least, have to be given temporary applause in his levitation act for delaying the inevitable. Cyclewise, the Chairman is at a bad point in history.

The downside of the lowering fed funds to 1 percent, was the development of the speculative housing mania which has eerie parallels to the practice of buying on ten percent margin by the shoeshine boys of the late twenties. With LIBOR interest-payment-only loans and no money down, the proportional leverage for the individual investor in the last five years was on a magnitude significantly greater than the prospects of the ten percent on- margin stock acquisitions in 1929. The 20's small-time investor was required at least have the ten percent up front to pay the margin broker with expected interest payments of 7-13 per cent. In the twenties this might represent an initial leveraged investment of ten to fifty dollars for the bulk of saving, thrifty spit shiners. As well most Americans in the late 20's did not participate in the stock market. At the nadir of the fed fund rates in 2003, no-principal payment loans were available with no money down and an entry level interest rate of near one percent. Under these conditions just about every wage earner who could afford the price of a monthly rental could do much better with a house mortgage. After the crash in 1929, regulatory action was brought to bear on the risky and imprudent loan practice of ten percent marginal buying. Seventy years later there is a surprising lack of intelligent anticipation and proactive federal regulatory action to prohibit the same sort of deju va lending problematic practices in the housing mortgage arena.

On 29 July 2005 the Wilshire 5000 (TMWX) had its third unretraced exhaustion gap occurring at 10AM EST at a level of 12450 gapping nonlinearly upward to a four year high at 12453-4, adding thereafter a few extra points. The exhaustion gap and peaking phase lasted only seven or so minutes before a reversal below the 12450 level occurred. July 29, a very odd and caricaturized key reversal day, was, nevertheless, technically, a key reversal day. Once again reflecting on the enormity of the 15 trillion dollar Wilshire summation index and the two antecedent un-retraced exhaustion gaps to new multiyear highs, this caricature of a key reversal day - will most likely - have to do.

It would be instructive to see if the Wilshire has ever, in its entire history, had three unretraced exhaustion gaps each going to a major multi-year high. Software available to the general public cannot acquire minutely charts for the March 2000 peak.

The three major European markets: the DAX, the CAC, and the FTSE all demonstrated key reversal days on July 29, 2005 with (exhaustion) gaps to multi-yearly highs followed by decay fractals ending at or near the low of the trading day.

While it is still possible for further equity growth within the 22/54/52 of 54 week maximum theoretical fractal time frame, the latter third and final 52-54 week terminal fractal composed of daily fractals numbering 51-52/130/ and 66 of a theoretical 103 maximum days, substantial further valuation growth is now much less likely to occur within the context of the above multiple-equity-indices, very characteristic, technical apogee footprints.
Gary Lammert

Posted by: gary lammert | August 01, 2005 at 11:04 PM

Dr. Altig, any thoughts of doing the same calculation for the BoE repo rates? I suppose a rate cut is priced in for Thursday (to 4.5%), but it would be interesting to see what the markets forecast going forward, especially since the BoE is at an apparent turing point.

Best Regards and thanks!

Posted by: CalculatedRisk | August 02, 2005 at 12:13 AM

CR - I wasn't aware that there was a market on BoE repo rates comparable to the market for options on fed funds futures. Can you point me in the right direction?

Posted by: Dave Altig | August 02, 2005 at 05:13 PM

Darn. I was hoping you knew of one! I'll ask around.

Posted by: CalculatedRisk | August 03, 2005 at 02:32 AM

CR -- We are asking around too. (More specifically John Carlson is.) Between the group of us, we will no doubt get it figured out.

Posted by: Dave Altig | August 03, 2005 at 05:58 AM

I can't believe that the U.S. is posting 0% personal savings rate, as announced for June 2005. Such a low figure would suggest that 401-K contributions are not counted towards savings? Why not I would ask? And what about the dollars from those who over fund the 401-K with post tax money? Arn't those dollars savings also?

Another factor may be housing. There must be a some conservatives out there who prefer to pay off a mortgage early, rather than paying the extra interest expense. If the extremely low mortgage rates over the past couple of years have allowed a percentage of home owners to shift to 15 year terms, then that in effect is saving as well, isn't it?

It seems the US savings calculation is to straight forward and simplistic and the implied results could be misleading.

What are your views on this issue?


Posted by: Chris von Kannewurff | August 11, 2005 at 03:38 PM

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