Monday, September 17, 2007

Where Will the Fed Funds Rate Go Tomorrow?

Since the much anticipated September FOMC meeting is tomorrow, I thought I would take a quick look at what the markets are thinking about the outcome of the meeting. The conventional wisdom is that the fed funds rate (ffr) target will for sure drop to 5.00%. The only questions is whether it goes to 4.75% or lower. Here is a graph from the Cleveland Federal Reserve bank that shows the probability of different ffr outcomes. These probabilities are calculated using options on fed funds futures. This figure shows a 48.6% probability of the FOMC pushing the ffr target to 4.75% and 44.4% probability of it moving to 5.00%--a close call.





Next look at the intrade contract for the ffr being equal to or greater than 5.00% by year end. The latest probability for this contract is at 15%. While this figure does not say at which FOMC meeting the ffr target will be lowered, it does say that there is a 85% probability the ffr target will be less than 5.00% by year end. Interesting times...



2 comments:

  1. Professor,
    Can you update your "Probit With Lags" chart as well as your "Policy Rate Gap" chart to reflect the new funds rate? I'm interested to see how they may have changed. Many thanks.

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  2. Anonymous:

    I too am eager to see too what the model shows, but unfortunately it is based on quarterly data. When Q3 data is released I can do a complete update. However, another idea would be to do a monthly esimate using a monthly proxy of economc activit like the coincident indicator or industrial production. I will look into it.

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