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# October Fed Funds...

Discussion in 'Financial Futures' started by basis, Sep 5, 2007.

1. ### basis

ZQV07 trading 95.175. Assuming no moves between meetings and relatively tight tracking of the target rate (which I think will be the case after a cut on Sep 18), this is giving a 50 bps cut on Sep 18 a probability of 70%.

Discuss.

2. ### VictorS

How do they calculate the % probability? I have always wondered .

3. ### nazzdack

(1) If the October is at 95.175, isn't that reflecting an 85% chance of a 50 basis point easing? 95.175 is 85% of the way from 94.75 (5.25%) up to 95.25 (4.75%). (2) If October were priced at 95.10, wouldn't that reflect a 70% probability?

100% likelihood cut to 4.5% priced in
95.05 ZQ 07 Sep contract

However, only about 8% likelihood priced by Res Bnk Cleveland of 4.5%
Their model predicts close run between 4.75 to 5% by sep 18 (38%:30%)

Post 5.

18 days into
30 days in month.

1st post is for october contract.
FOMC meeting is on sep 18.
Use september contract for prob model.

5. ### basis

(95.175-94.75)/(95.25-94.75)=85%

Sorry, I was looking at some other stuff and misspoke.

And you can use Oct for this (and it's better) because Sep has half a month at the old rate if there's a change, and Oct's meeting is on the 31st. So October, assuming no change between meetings, reflects nothing but the outcome of the Sep 18 meeting.

I'm looking at September Fed Funds.

The effective rate has been below the target rate by an average of 21 bps up til the 6th.

I still haven't seen the data for the effective rate for today, the 7th, but speculate it will be around 4.75%. "Panic days" in the mkt recently have shown similar observations for the effective rate.

What I'm wondering is; where will the effective rate bottom out?

If we cut 25 bps , to 5% and maintain a 21 bps spread between effective and target we'll be looking at an effective rate close to 4.75%.

If we cut 50 bps, to 4.75% I'm assuming we'd still bottom out at 4.75% effective and the spread of 21-25 bps b/w effective and target should dissipate.

So in both scenarios the effective rate goes to 4.75%.

Assuming 9/7/07 effective is 4.75%

If the Fed cuts (25 or 50) on Monday the 10th we'll have:

10 days @ 5% effective (cumulative avg up to the 7th forecast)
20 days @ 4.75% effective
Renders 30 day average rate @ 4.81% and a SEP futures price of 95.19.

Now; I personally don't think we'll get intermeeting. So let's see how the expected value of SEP looks like , again assuming 9/7/07 (and weekend figures) are 4.75% effective. Let's also assume that on average from the 7th to the 18th the average effective rate stays around 5%.

18 days @ 4.97% effective (that's using existing data and assuming 9/7 , 9/8 , 9/9 are 4.75%, and all other data points up to the meeting are at 5%, or a more "normalized?" 25bps spread to target)

12 days @ 4.75% effective

Renders 30 day average rate @ 4.88% and a SEP futures price of
95.12

ANY opinions on where you expect the effective rate to "bottom" out? I personally think we only get 25bps and we bottom out at 5% EFFECTIVE ; but todays 9/7/07 observation to me is key and might set the tone for the rest of the month's observations.

I personally don't think we'll see an effective daily observation above 5% for the rest of the month.

Opinions?

I shorted some SEP at 95.07 towards the close but risk /reward, after looking at these forecasts looks pretty lame.

Then again I might be way off base thinking we don't see 5% plus effective readings up to the meeting and that the "natural" equilibrium level for the rest of the month is 4.75%.

7. ### Pa(b)st Prime

I'm in the same boat. Short Dec. You're completely right. 25bp is not speculation it's reality. More and more 37-50 is where Funds are really trading. Hell if they cut .50 and actually maintain the rate you'll do no better than what the market is facilitating presently.

Pabst; so you see effective FF holding steady at 4.75?

Would seem only logical for Fed to cut to 4.75 to bring target in lie with effective?

I think I'll cover my Sep on Sunday.

9. ### Pa(b)st Prime

They really have to go only .25. In this environment they can't be Indian givers. (no offense meant to any PC POS's on board). There's only been a couple of nights where settlement has been dramatically lower than 5%. Those lowball sub 5's were all in the liquidity pump day's proceeding the DR cut.

At this point I truly believe Bernanke (and with greater certainty, the voting Board) are as much spooked by commodity strength and dollar weakness as they are by the recent market events domestically. The Fed can't save housing, stocks and related construction, real estate and financial service gigs. No one in their right mind believes the difference between a Miami condo selling or not is a cut by the Fed. What IS in the Federal Reserves hand is the future of the currency. Much of this inflation is being caused by cheap dollars allowing foreign buyers easy access to material and foods. Thus protecting the dollar will be paramount in the fight against inflation.

IMO they go .25. Kicking and screaming. The policy statement will scare the shit out of stocks. To investors Bernanke will be the bogeyman. To FX traders he may be the event causing a formidable swing high in the dollar.