Short term interest rates are perhaps the most important factor in the economy and in the United States they're controlled by the Federal Reserve. Increasing or lowering the Federal Funds Rate has a ripple effect across the whole economy and impacts nearly all asset prices. If one agency can influence nearly every asset price, wouldn't it be nice to know what they're going to do in the future? I can't answer that, but I can show you what the market thinks they will do in the future.
First up is the CME FedWatch Tool:
This shows probabilities of different interest rate outcomes at future FOMC meetings. As you can see above, the market is pricing in a 78.6% chance of a 25bps cut at the July 31 meeting and 21.4% chance of a 50bps cut. This tool goes nearly a year out to the April 2020 meeting where the market frankly isn't too sure where rates will be:
Fortunately I've seen a few traders on here using this tool and hope to see it more in the future.
Next up are Short Term Interest Rate (aka STIR) futures. As with all interest rate futures, higher prices indicate a lower yield. The two STIR futures I find the most useful are 30 day Fed Funds Futures (symbol ZQ) and the Eurodollar (symbol GE). Interest rates are roughly calculated as 100 - futures. The August ZQ contract is trading for 97.92 so that implies a Fed Funds Rate of about 2.1% in August.
As you can see above, the futures curve goes up until February 2021 which means the market expects the Fed to cut rates until that point and begin tightening thereafter.
Lastly, I'd like to introduce Eurodollars (GE) as a tool. Eurodollars (not EUR/USD) are a complicated instrument, but at the end of the day they're really very similar to ZQ. The advantage of looking at GE is its the most liquid futures contract so its priced much further out. Here's how GE looks now:
GE's telling the same basic story as ZQ in the short run with an August rate of about 2.1% and cuts until March 2021. What's interesting is you can see so much further out. GE shows gradual Fed hikes until 2026 at which point there may be some steep increases.
Using the 3 tools illustrated above you can see what forward expectations are for interest rates. In another thread I recently started I explain the importance of market expectations and how they can be used to profit. In the cases of ZQ and GE you can see the market thinks the Fed will cut into 2021. Why would the Fed cut until 2021? Point blank, STIR futures are pricing in a recession. If your forecast doesn't call for a recession then there's a lot of opportunity to make money right now. Alternatively, even if you do expect a recession there's still a lot of money to be made by shorting risk assets like industrial metals or equities.
First up is the CME FedWatch Tool:
This shows probabilities of different interest rate outcomes at future FOMC meetings. As you can see above, the market is pricing in a 78.6% chance of a 25bps cut at the July 31 meeting and 21.4% chance of a 50bps cut. This tool goes nearly a year out to the April 2020 meeting where the market frankly isn't too sure where rates will be:
Fortunately I've seen a few traders on here using this tool and hope to see it more in the future.
Next up are Short Term Interest Rate (aka STIR) futures. As with all interest rate futures, higher prices indicate a lower yield. The two STIR futures I find the most useful are 30 day Fed Funds Futures (symbol ZQ) and the Eurodollar (symbol GE). Interest rates are roughly calculated as 100 - futures. The August ZQ contract is trading for 97.92 so that implies a Fed Funds Rate of about 2.1% in August.
As you can see above, the futures curve goes up until February 2021 which means the market expects the Fed to cut rates until that point and begin tightening thereafter.
Lastly, I'd like to introduce Eurodollars (GE) as a tool. Eurodollars (not EUR/USD) are a complicated instrument, but at the end of the day they're really very similar to ZQ. The advantage of looking at GE is its the most liquid futures contract so its priced much further out. Here's how GE looks now:
GE's telling the same basic story as ZQ in the short run with an August rate of about 2.1% and cuts until March 2021. What's interesting is you can see so much further out. GE shows gradual Fed hikes until 2026 at which point there may be some steep increases.
Using the 3 tools illustrated above you can see what forward expectations are for interest rates. In another thread I recently started I explain the importance of market expectations and how they can be used to profit. In the cases of ZQ and GE you can see the market thinks the Fed will cut into 2021. Why would the Fed cut until 2021? Point blank, STIR futures are pricing in a recession. If your forecast doesn't call for a recession then there's a lot of opportunity to make money right now. Alternatively, even if you do expect a recession there's still a lot of money to be made by shorting risk assets like industrial metals or equities.
Self-sufficiency is the greatest of all wealth. - Epicurus
