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September 06, 2005
Post-Katrina Funds Rate Expectations: Update
As I anticipated in my previous post, the brains and brawn behind extracting estimates of prospective federal funds rates from options on funds futures contracts -- namely John Carlson and Erkin Sahinoz -- were hard at work today. As a result of their efforts, the verdict is now in on where the market stood at Friday close with respect to the next two FOMC meetings. As you might have guessed, the expectation of a pause after a 25 basis point increase next week has taken the lead:
Here's a version with the timing of the week's news indicated:
As a special bonus for your patience, here are the results obtained from the January 2006 contract, which carries us through the December FOMC meeting:
Pause, pause now has the largest probability attached to it, and you can put that squarely in the lap of Katrina.
For you aficionados out there, the January estimates were obtained with some new and improved features in the estimation methodology. Specifically, the estimated probabilities are constrained to sum to one, and the mean is constrained to be consistent with the value of the funds rate implied by the actual futures contracts. I expect that future estimates will be calculated in this way.
Here's the data for the pictures above, for you to enjoy at your leisure:
UPDATE: There are, of course, a lot of opinions about where the FOMC is heading out there in bloggerville (and beyond). New Economist, Economist''s View, and Everyone's Illusion provide a sampling.
September 6, 2005 in Fed Funds Futures | Permalink
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bailey |
September 06, 2005 at 08:08 PM
Obviously, the equity markets & tactically positioned bond players would LOVE to see AG STOP raising rates IMMEDIATELY. But, what about the reasons WHY AG's been raising rates so deliberatively for the last 15 months? For three years the Fed AND the Administration worked in concert to flood our economy with money & credit seen in recent yoy numbers: bank credit (13.2%), securities credit (11.3%), r.e. loans (16.6%), commercial paper (19.4%), large denominated deposits (22%) & m3-money funds (6.4%), These numbers are HUGE and can't be supported by our economic prospects. Will AG continue to pressure the financial community to reeling in their lending operations or will he "PAUSE" in hopes the sum of enacted increases will, in time, be enough. The latter would make sense IF the financial community had given ANY indication it was ready to discourage risky borrowing, BUT THEY HAVE NOT! AG KNOWS THIS, as does his cohorts.