Based on the Fed Funds futures traded at the Chicago Board of Trade, the market forecasts that the Federal Open Markets Committee (FOMC) of the Federal Reserve will cut the Fed funds rate 25 basis points to 2% at its April meeting, which concludes on April 30.
Based on the prices of distant Fed Funds contracts, this will be the last rate cut of the current easing cycle and the Fed will begin tightening rates beginning with a quarter percent increase back to 2.25% at the meeting ending on Oct. 29 or at the December meeting.
In mid-March Fed Funds futures prices indicated that the Fed would drop the Fed Funds rate to between 1.50% and 1.25% by the fourth quarter. It appears that the Fed is finally heading the inflationary warning signs, but why now?
Never has the Fed been more aggressive in its easing, particularly without acknowledgement that the economy is in a recession, then it has since the current cycle began in September. That the Fed would begin tightening when the economy is likely to be feeling the full affect of the current downturn and as our consumer driven economy is entering the holiday spending season, seems odd. But as we noted here before, the Fed is close to running out of bullets and the real inflationary pressure the economy is facing can no longer be ignored.
But I think it is fair to ask, why wasn’t the Fed concerned about the real inflation pressures that were obvious to many of us back in September when they launched this aggressive easing cycle?
While Fed Fund futures have been a accurate predictor, it would be good to remember that the best predictor of Fed activity over the last year has been the equity markets. When the Dow has dropped the Fed has come riding to the rescue. And if the economy officially falls into recession (which may already be the case) and equity markets retreat, there will be a great chorus of voices from Wall Street calling for additional easing. The current Fed has no experience thus far in disappointing those voices.
Tags: Fed, Fed Fund futures, FOMC
