Dispelling Fed Funds 'Myths' (Rates Aren't Going Up)

I'm following chatter of media and friends about the imminent doom that may come from Fed Funds rates increases, and that the market perceives a higher chance that the Fed pull away from zero interest rate policy soon. First, 2 Fed Funds charts showing no evidence the market perceives a risk that the Fed changes its policy near term. In fact, quite the opposite, bets are being put on that support extension of zero interest rates. The past 2 weeks have most definitely seen increased expectations for lengthening of current policy.

March 2010 Fed Funds contract:



And January 2011 Fed Funds contract.

Remember, the higher this goes, the lower the interest rates. 98.80 means expectation of a 1.2% effective fed funds. 95.00 would mean an expectation of 5% fed funds.



Now to the piece of "common sense" that says the market would fall when Fed stimulus reverses course. First, from a history of 1954 to present, with blue areas showing periods of rising interest rates, followed by a 1970 to present snapshot (more relevant data set perhaps).



And 1970 to present:




To me, Fed hiking looks more like a bullish signal and Fed loosening is more unpredictable (for good reason, as it responds to contractionary periods). It almost seems like there is a conspiracy in the media to get people to sell this move up. Maybe that's a silly and paranoid presumption. Right?

Comments

[Mad Hedge F...:]

avi First of all, let me warn you that reading this paragraph is a complete waste of your time. Still interested? There is chatter about that the Fed is considering a surprise interest rate rise at its upcoming meeting. After all, where can they go from zero, but up? They could be emboldened by the recession ending Q3 GDP of 3.5%. The bond market is certainly telling us that rates should go higher, with yields on ten year Treasuries jumping from 2.45% to 3.40% since March. Unfortunately, this is the usual kind of gibberish you get from pundits and prognosticators , who, at a loss for any explanation of the real reasons for Friday’s melt down, resort to making stuff up out of thin air. US industrial capacity utilization is terrible, while unemployment is rising to record levels. Banks still aren’t lending to small businesses, the largest job creators in the country, because they are about to get hit with an onslaught of bad commercial real estate loans. Sure, commodity prices have doubled or tripled this year. But this happened because investors were desperate for any alternative to the sickly dollar, not because there is huge underlying demand by end users. This is one of the reasons why I have been ringing the alarm bell about all long positions for the last three weeks. So I can say with complete confidence that the chances of an interest rate hike are less than zero for the foreseeable future. This discussion did have the one benefit that it did enable me to fill this space in my newsletter.

Nov 02 02:07 PM