5. Fed Funds Futures Downplay Serious or Rapid Rate Hikes
Market pundits, economists, politicians, Fed governors and Treasury employees can spitball all they want about where interest rates are going. There is a real market out there for fed funds, and that is the 30-day federal funds futures trading every day on the CME.
The CME describes each underlying unit as “Interest on Fed Funds having a face value of $5,000,000 for one month calculated on a 30-day basis at a rate equal to the average overnight Fed Funds rate for the contract month.”
The most active contracts by volume are July 2015 to February 2016. Market pundits still talk about a June rate hike being on the table, but the reality is that fed funds futures currently do not show an expected rate hike (100% priced in) until November 2015. The fed funds futures also do not really seem too concerned about an August or even September time frame as of mid-May.
Now, let’s go further out. Fed funds futures do not have a 100% priced-in chance of a 0.50% fed funds rate until April of 2016, with a better-than-not chance not coming into play until January of February of 2016. And for the timing of when fed funds will hit a whopping 1.00%, the 100% chance is currently not until December 2016, with a better-than-not chance only in November of 2016.
The hope is that the markets and the economy will be able to handle a 1.0% fed funds rate. Still, the interest rate sensitivity of the markets just does not lend credence to a rapid rate hike cycle. If this is May of 2015, and the fed funds futures are currently pegging very late in 2016 for a 1.00% fed funds rate (and a 1.50% fed funds is not predicted before June of 2017), why should you be all that worried about rates rising too far and too fast?