December 16, 2015 may be the date in which the Fed finally makes a move to possibly raise the federal funds rate. This has been an idea that the Fed has been toying with since at least 2012 and even after all that time, the Fed still has its doubters and detractors that the economy can withstand higher interest rates.
On December 16, 2008, the Federal Funds target rate was moved from 1.00% to a range of 0.0-0.25%. During the past seven years, the Federal Funds Rate target rate has remained in a range at 0.0-0.25%. During the October 2015 FOMC meeting, there were some strong expectations that the Federal Reserve would raise the Federal Funds rate, but voted against it. Tomorrow’s FOMC announcement may change this long stand.
The Fed Funds Futures contract trading on the Chicago Board of Trade (CBOT) are sitting at 99.7750 for the December Futures Contract and 99.68 for the January Futures Contract. The Fed Funds Futures are priced by subtracting the target Fed Funds rate from 100.
Example: 1% Target Fed Funds Rate = 100-1 = 99.00 Fed Funds Futures Price
1.25% Target Fed Funds Rate = 100-1.25 = 98.75 Fed Funds Futures Price
With the December Fed Funds Futures contract indicating .225% interest rate for December, being on the higher end of the range, this is a strong indication that the market is expecting an increase in the Fed Funds target rate.
There are several possible outcomes from the FOMC meeting in regards to setting the Federal Funds target rate. The FOMC could maintain the rates at 0.0-0.25%, which is not being expected. The FOMC may choose to set the new rate at .25%; the FOMC may vote to raise rates into a range of .25-.50%; or the FOMC may just increase rates to 0.5%. The wording and the chosen level will be very interesting as to determining how the futures markets and markets may react. While the current effective rate is near 0.25%, and is in the 0-0.25% range; the question is if the Fed removes the range and the target interest rate just becomes 0.25%, will the market react differently? Another question is whether the FOMC will continue to use ranges instead of strict target interest rates? The FOMC could possibly make the move to 0.25%-0.50% with an effective rate of about 0.33%.
Time will only tell how the markets and traders will react to the upcoming announcement. Some traders will find the announcement bullish for their specific market and some traders will find it bearish for their specific markets. The greatest part of Free Markets is that some traders will interpret the upcoming news one way, while others will interpret it differently.
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