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After Friday's employment report, the question regarding the Fed now seems to have shifted from if they will cut to how much they will cut. Fed Fund futures are now predicting that the Fed will lower rates by 100 basis points over the next six months. However, before we bank on rate cuts as far as the eye can see, we would caution that the record of the futures market in predicting the future Fed Funds rate leaves a lot to be desired.

The chart below shows the spread between what the Fed Funds futures are predicting and the actual rate six months out from a given day. Since 1998, the market has had some periods where it was widely off the mark. Consider late November 2000. Granted this is an extreme example, but it illustrates the point. At the time, the market was expecting the Fed Funds rate to be around 6.25% come late May of 2001. The actual Fed Funds rate in late May was 4%.

click to enlarge

Source: Fed Fund Futures Versus Reality