Gavekal Capital: Ahead Of The FOMC Minutes: Fed Funds Rate Expectations Continue To Nose-Dive

Wednesday, April 8, 2015

Ahead Of The FOMC Minutes: Fed Funds Rate Expectations Continue To Nose-Dive

Not even a month ago, we wrote about how it looked like the market was pricing in two rate hikes in 2015 and four in 2016. Well, apparently a lot has changed (at least regarding expectations) since then. The December fed funds futures is only pricing in about one hike from the current effective fed funds rate. Fed fund futures are pricing in a 36 basis point fed funds rate for the end of 2015. This is about half the level that the market expected for most of 2014.

Unsurprisingly, 2016 fed funds rate expectations have fallen sharply as well. The market is now only pricing in a fed funds rate of 101 basis points by the end of 2016. This implies the market expects only 2 and half rate hikes in 2016. So we have gotten to the point where the market expects the fed funds rate to only be 20 basis points higher by the end of 2016 compared to where the market expected in September 2014 for the fed funds rate to be by the end of 2015. Rate hike expectations continue to be pushed back.

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