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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January 09, 2006

The Employment Report And The Expected Funds Rate Path: Not Quite What I Expected

The holiday last Monday, and the absence of Tuesday data sent our way from the Chicago Board of Trade, made for a short week of prices from options on federal funds futures.  Our first snapshot of  market sentiment following the release of the minutes from the Federal Open Market Committee's December meeting came on Wednesday, and the vote was clear: Prices were clearly reflecting the belief that the Committee is getting closer to saying enough is enough on the accumulating 25 basis point funds-hike installments. 

Given the commentary following Friday's employment report, I was pretty sure we would see more of the same by the week's end.  But -- you may want to sit down for this -- I was wrong.  The implied probability of a 25 basis point increase in both January and March increased with the news that, on the job creation front, December was worse than expected, but November was a lot better than originally reported.  The pictures:



Still, on balance the estimated probability that the federal funds rate is now 50 basis points lower than it will be by March fell over the course of the week.  We'll get some influential economic news by the end of this week in the form of the December producer price index and retail sales reports, and there are a fair number of speeches scheduled for Federal Reserve officials.  Those may help bring the picture for March into sharper focus. Or not.      

The data, for the record:
Download Imp_pdf_slides_for_blog_01062006-1.ppt
Download implied_pdf_january_010606.xls
Download implied_pdf_march_010606.xls

January 9, 2006 in Fed Funds Futures | Permalink


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» What's the Fed waiting for? from Econbrowser
The Fed is likely to stop raising rates soon. What will be the final signal that enough is enough? [Read More]

Tracked on Jan 9, 2006 9:36:22 PM


David, check out forward curves (and to a lesser extent Fed Funds futures) for the May 10 and June 30 Fed meetings. Markets are pricing in an ever-increasing chance of a rate cut almost immediately after the last rate increase (presumed to be with a 4.75% terminal rate). This is based on the trend over the past three hiking cycles of a rate *cut* 6 months after the last *hike*. Myself, I think it's madness to invest based on that trend. This has been the longest, slowest and most measured hiking cycle in decades, we're left with a terminal rate that is neutral, not restrictive, and the economy and housing markets don't wilt so quickly that the data will even indicate a slowdown by May.

Posted by: Bond manager | January 10, 2006 at 09:36 AM

Bond manager -- I wholeheartedly endorse your note of caution about too simple extrapolation from the past. To your list of things that may different this time i would add the fact that inflation expectations just simply aren't budging. On the other hand, I don't begrudge people's concern about the flattening of the yield curve as an indicator of whether we might have drifted up past neutral.

We don't have a good read on the May or June options prices yet -- still too thin -- but will keep at it so we can get richer view about what's going on beneathe those forward and futures patterns.

Posted by: Dave Altig | January 10, 2006 at 11:43 AM

Investor's Business Daily had some interesting news.

Point #8 on the IBD Top 10 (Today's Cover Page):

Consumer Credit Declines again

You can read specifics in the article. Debt levels have been down just a little bit recently.

I am not sure how to interpret this. You might spin it either way. One might say this signals a strong economy and the need to raise rates more. One also might say people are hesitant to spend on credit, and the fed may need to pause on raising rates.

How do you interpret this data?

Posted by: nate | January 10, 2006 at 02:33 PM

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