Monetary Policy Review: What the Market Really Expects
Futures Rate as a Predictor of FED Actions
Very often we hear people say rather casually, ‘The Fed will do X’ or ‘The Fed will not do Y’. Such statements may sometimes be more or less right. However, they often directly contradict what markets expect the Fed to do. Those expectations are NOT just words but rather tradable instruments — Fed Funds Futures.
Actual contract specification can be quite interesting. For example, the Dec 2023 contract will settle into the daily average Fed Funds for December 2023. In that sense, the contract value is not what Fed Funds will be on any particular day in the future. It is rather what the average Fed Funds will be for that entire month in the future.
Let’s have a look at what the market is saying about future interest rates based on Fed Fund Futures:
| Date | Fed Funds 13/1/2023 |
| Jan 2023 | 4.33% |
| Feb 2023 | 4.40% |
| Mar 2023 | 4.66% |
| Apr 2023 | 4,80% |
| May 2023 | 4.90% |
| Jun 2023 | 4.90% |
| July 2023 | 4.90% |
| Aug 2023 | 4.85% |
| Sep 2023 | 4.82% |
| Oct 2023 | 4.75% |
| Nov 2023 | 4.60% |
| Dec 2023 | 4.48% |
| Jan 2024 | 4.38% |
| Feb 2024 | 4.15% |
| Mar 2024 | 4.05% |
| Apr 2024 | 3.88% |
| May 2024 | 3.63% |
| Jun 2024 | 3.50% |
| July 2024 | 3.37% |
| Aug 2024 | 3.18% |
| Sep 2024 | 3.15% |
| Oct 2024 | 3.05% |
| Nov 2024 | 2.95% |
| Dec 2024 | 2.92% |
| Dec 2025 | 3.00% |
| Dec 2026 | 3.23% |
| Dec 2027 | 3.50% |
To ensure there’s no mistake in reading the chart — right now, Jan 2023 Fed Funds are expected to average 4,33%. In Feb 2023, they are expected to average 4,40%, and in March 2023 — 4,66%. Currently, Fed Funds target rate is between 4,25% and 4,50%, so the market expects the Fed to raise rates in March 2023.
The table itself is helpful but just a snapshot of current expectations. Let’s look at the table next to what the table looked like one month ago:
| Date | Fed Funds 13/1/2023 | Fed Funds 13/12/2022 | 1 Month Change |
| Jan 2023 | 4.33% | 4.35% | -0.020% |
| Feb 2023 | 4.40% | 4.28% | 0.120% |
| Mar 2023 | 4.66% | 4.69% | -0.030% |
| Apr 2023 | 4.80% | 4.81% | -0.010% |
| May 2023 | 4.90% | 4.85% | 0.050% |
| Jun 2023 | 4.90% | 4.84% | 0.060% |
| July 2023 | 4.90% | 4.83% | 0.070% |
| Aug 2023 | 4.85% | 4.80% | 0.050% |
| .Sep 2023 | 4.82% | 4.75% | 0.070% |
| Oct 2023 | 4.75% | 4.70% | 0.050% |
| Nov 2023 | 4.60% | 4.55% | 0.050% |
| Dec 2023 | 4.48% | 4.44% | 0.040% |
| Jan 2024 | 4.38% | 4.37% | 0.010% |
| Feb 2024 | 4.15% | 4.18% | -0.030% |
| Mar 2024 | 4.05% | 4.09% | -0.040% |
| Apr 2024 | 3.88% | 3.95% | -0.070% |
| May 2024 | 3.63% | 3.74% | -0.110% |
| Jun 2024 | 3.50% | 3.67% | -0.170% |
| July 2024 | 3.37% | 3.55% | -0.180% |
| Aug 2024 | 3.18% | 3.43% | -0.250% |
| Sep 2024 | 3.15% | 3.33% | -0.180% |
| Oct 2024 | 3.05% | 3.25% | -0.200% |
| Nov 2024 | 2.95% | 3.14% | -0.190% |
| Dec 2024 | 2.92% | 3.05% | -0.130% |
| Dec 2025 | 3.00% | 3.17% | -0.17% |
| Dec 2026 | 3.23% | 3.40% | -0.17% |
| Dec 2027 | 3.50% | 3.65% | -0.15% |
Sources:
Disclaimer: