CBOT CONTRACT PREDICTS NO
RATE RISE
By Daniel J. Yovich
BridgeNews
August 21, 2000
It seems to be a foregone conclusion that the Federal
Open Market Committee will take no action Tuesday
when it meets to discuss U.S. interest rate policy.
The most accurate predictor of what the Federal Reserve
will do with rates--the federal funds futures contract
traded at the Chicago Board of Trade--supports market
sentiment, showing less than an 8 percent chance of a
rate increase by Fed Chairman Alan Greenspan and other
policymakers at the meeting.
Offered by the CBOT since 1989, the fed funds contract
is a tool for banks and investors to hedge against
movement in the fed funds rate.
The odds are that the FOMC will do exactly as the fed
funds futures contract dictates. The indication suggested
by fed funds futures markets on the Friday before the
FOMC meeting has correctly forecast the policy decision
31 of the past 32 times.
The September fed funds futures contract was trading at
6.50 percent, right at the fed funds target rate, showing
traders see virtually no chance of immediate Fed interest
rate intervention.
Edward Dworkin, a fed funds futures trader, said he was
confident the Fed policymakers would take no action until
November at the earliest. Dworkin noted October fed
funds was showing only a 6 percent chance of further
rate increases, while the November contract reflected a
50 percent chance for a 25-basis-point increase in rates in
November.
Before the most recent June 28 FOMC meeting, the July
fed funds contract closed at a yield of 6.56 percent--6
basis points above the 6.50 percent funds target rate.That
is just 24 percent toward fully discounting a 25-basis-point
rate rise. The Fed left interest rates unchanged.
Each of the past six times the Fed has increased rates,
the fed funds contract showed a larger than 50 percent
chance of an increase.
Treasury futures and options traders said it was unlikely
that there would be additional interest rate tinkering this
year.
"It looks as if Greenspan's done a good job and can now
retire," said Brad Tyl, a senior vice president at IBJ
Lanston Futures. "I think we're starting to see the soft
landing he's talked about." |
