Yellen's Rate Hike Meatball: Other Fed Presidents vs. Fed Funds Futures

Sometimes the markets just can’t trust what Federal Reserve and central bank officials say individually. That is the verdict after this week’s annual retreat in Jackson Hole, Wyo. Janet Yellen canned the idea of sooner-than-expected rate hikes by opining more strongly that the labor market has yet to fully recover. Other members of the Federal Open Market Committee (FOMC) do not entirely share her view, and some were much more hawkish. 24/7 Wall St. wanted to give some Yellen snippets, as well as showing what other Fed presidents were quoted saying. We also showed what Fed Funds futures were pricing in ahead to see what the actual market bets are signaling.

Janet Yellen noted that the quicker pace to reaching an unemployment rate of 6.5% or less does not mean that all is well, nor does it imply that the FOMC will hike Fed Funds rapidly now that that target has been reached.

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Yellen also keyed on the fact that the employment-to-population ratio has increased far less over recent years than the unemployment rate would suggest. Another point was that nearly 5% of the labor force is part-time workers who would rather have full-time employment. Referring to the Fed’s labor model and to rate hikes, Yellen had two key quotes:

The labor market has improved significantly over the past year, but [the Fed model] also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.

It likely will be appropriate to maintain the current target range for the federal funds rate [0% to 0.25%] for a considerable time after our current asset purchase program ends.

As far as the Fed dissenters and those talking about the rate hike timing and direction, these were as follows:

  • Kansas City Fed President Esther George said that it is time for the central bank to think seriously about raising Fed Funds above the current near-zero percentage levels.
  • St. Louis Fed President James Bullard echoed Esther George.
  • San Francisco President John Williams told CNBC that he still expects that the first rate hike would be by summer of 2015.
  • Atlanta Fed President Dennis Lockhart basically sided with Williams and Yellen.

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One key issue to consider for Fed Funds and short-term rates is the market for 30-day Federal Funds (Fed Funds) futures. Each Fed Funds contract has a face value of $5 million for one month, calculated on a 30-day basis, so there is real money behind these contracts (of which more than 55,000 contracts traded on Friday). Fed Funds futures signaled that rates will rise in certain increments by the following time periods:

  • 0.25% Fed Funds rate is not priced in until June of 2015.
  • 0.50% Fed Funds rate is not priced in until October of 2015.
  • 1.0% Fed Funds rate is not priced in until April of 2016.
  • 2% Fed Funds rate is not priced in until April of 2017.

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