Fed Funds Rate Predictions (May 2007)

Wednesday, May 09, 2007 | 10:52 AM

The Federal Reserve Bank of Cleveland maintains an implied probability of FOMC meeting outcomes on thier site. This month shows a very high probability -- about 97 98.5% -- of no change in the Fed Funds rate.

Here's the chart for the FOMC May meeting:

click for larger chart



The market is now pricing in less than a 5% chance of a cut at the June 28 FOMC meet and greet; August 7th we are looking at less than 20% chance of a cut.

When we look into the Fall, things begion to change: The September 18 meeting is between a 40% - 50% chance of a rate cut.


From the Cleveland fed site:

Options on federal funds futures can be analyzed to extract public expectations of future Fed actions. The charts below show what markets believe the most likely outcome of upcoming FOMC meetings will be. The charts are updated every business day and reflect the most recent data released by the Chicago Board of Trade. Probabilities can be estimated with various assumptions, which are described in detail here and in the readme worksheet of the downloadable Excel file. The assumptions used to construct each day's charts are indicated immediately below the pictures.


Hat tip: Macroblog



Fed Funds Rate Predictions
Economic Research and Data Monetary Policy
The Federal Reserve Bank of Cleveland, May 8, 2007 

Wednesday, May 09, 2007 | 10:52 AM | Permalink | Comments (7) | TrackBack (0)
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Sorry, but I've got to ask. What good is it?

Maybe I'm reading this thing wrong, but it seems to be telling me it's generally a poor predictor of the fed funds rate for anything other than a few weeks out.

Look at the December 18th datapoint, roughly a 28% chance of a cut, only a 41-42% chance they'll stand pat. I wish I had saved some of the older predictions, I'm sure they were likely much more pessimistic about the May meeting.

Has the economy improved so markedly since December as to warrant such a change? Or is the Fed Funds Futures market just a bunch of pessimistic bears?


Posted by: James Bednar | May 9, 2007 11:47:03 AM

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