Market is underestimating the extent of next year's Fed tightening? - Scotiabank
|Analysts at Scotiabank explained that the Fed funds futures contracts settle at the average effective rate for the month.
Key Quotes:
"The Fed says that three rate hikes next year are likely to be appropriate. The current effective average is 1.16%. The 25 bp rate hike that is nearly fully discounted for next month will lift the effective average to 1.295% in December (due to the meeting on December 13, and assuming a somewhat lower rate at the very end of the year as has been the case at end of quarters this side of the financial crisis). The effective rate in January (FOMC meeting on last day of the month) is 1.39 bp. The December 2018 Fed funds futures contract currently implies an effective average of 1.735%. That seems to be pricing in one hike next year. The market is underestimating the extent of next year's Fed tightening, but we see it through its monetary policy actions, not through its balance sheet."
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