If you look over recent fed governor speeches from just last week, thetalk is on no more cuts and that rates have come down. Speeches fromFOMC Vice Chairman Donald Kohn and San Francisco president Janet Yellenshowed a Fed that doesn’t want to cut rates any further. There waseven a comment that the last cut was a close call. The FOMC minutes also show a FOMC that has had to grow more and more concerned with inflation, even as they lowered there own forecasts for GDP.
The truth is that the last rate cut cycle was geared more towardhelping the financial institutions get out of an inverted yield curve.The public probably doesn’t want to hear it, but that was more important on a macroeconomic basis than whether or not 5 in 1,000 homes or 8 in 1,000 homes was foreclosed upon. Joe Q. Public’s problems go much farther than if Fed Funds were at 2%or at 3%. The last rate cuts for the public just meant that anequivalent of 12 lashes in public were administered rather than 15lashes. The banks made credit too easy for too many years, and thepublic took advantage of it for too many years.
We took a look at 30-Day Fed Fund Futures at the CBOT with Friday’s last seen levels to make several determinations. For starters, the futures pricing is showing that the downward rate cycle is almost as good as over.
We wanted to take a look at what the 30-Day Fed Funds Futures levelswere pricing in. Below is that pricing matrix from Friday’s closinglevels, and the "implied" number is merely an eye-ball number todetermine a future rate and percentage chance for the direction ofrates:
DATE PRICE IMPLIED
08May 98.0250 1.975%
08Jun 98.0150 1.985%
08Jul 98.0250 1.975%
08Aug 98.0150 1.985%
08Sep 97.9950 2.005%
08Oct 97.9550 2.045%
08Nov 97.8900 2.110%
08Dec 97.8600 2.140%
09Jan 97.7750 2.225%
09Feb 97.5800 2.420%
09Mar 97.4650 2.535%
09Apr 97.3750 2.625%
09May 97.2200 2.780%
09Jun 97.1500 2.850%
09Jul 97.0300 2.970%
09Aug 96.8750 3.125%
The truth is that the exact numbers aren’t the most important issue, and once again these are merely eye-balled numbers that aren’t down to anything exact.These implied rates and futures prices can also change on any hour ofthe day given any myriad of economic reports. These numbers are alsorarely accurate to the percentage as you go farther and farther out onthe curve. But here are some suppositions based upon this data:
There is less than a 10% chance of another 25-basis point rate cut through August 2008.
There is about a 2% chance of a 0.25% rate hike by September 2008 andless than a 20% chance for a rate hike of a 0.25% rate hike by October2008.
But by December 2008 the chances of a 0.25% rate hike have crossed the50% chance barrier. That becomes a 90% chance of a 0.25% rate hike byJanuary 2009.
By March 2009 we are over an implied 2.25%, over an implied 2.50%, andthe chances of rates being up another 0.125% or 0.25% higher startcoming in at less than 15%.
Once again, the exact numbers start to sound wishy washy as you gofarther and farther out in time. But the end result is that currentfed fund futures prices show that rates will be up at least 100basis-points or 1.00% by August 2009.
If you are an interest rate purist, this may at least be a good sign that the US Dollar won’t completely have to be renamed the US Peso.
Jon C. Ogg
May 25, 2008