Fed Funds Futures are not widely used by Joe Public, and much of the public may not even understand or know what these are. The layman explanation is that they predict when the FOMC rate hikes are expected to start.
The Fed Funds Futures are very different today from a week ago after Ben Bernanke and his minions at the FOMC predicted that rates would be “exceptionally low through at least the end of 2014.” Prior to that, it was a mid-2013 promise. The reality is the FOMC has no obligation to commit to any time frame and the late-2014 was a projection rather than a commitment. Still, this was a ‘risk-on’ signal if there ever was one.
Fed Funds Futures are now showing a 100% chance of a rate hike in December 2013. That is the first month where the price is under 99.75 and this is the first time in quite a while that a rate hike has been this close. What is interesting is that there is still close to an 80% chance of a rate hike by August of 2013. Should you panic? Absolutely not. The rate hike would just remove the 0.00% to 0.25% range up to a formal 0.25% Fed Funds Rate.
It is still all the way out to September of 2014 now before the Fed Funds Futures are calling for a 100% chance of a 0.50% Fed Funds Rate.
Daily rates can be seen here for Fed Funds Futures from the CME.
JON C. OGG