Updating The Fed Funds Curve

As part of yesterday’s video about Federal Reserve Chairman Powell’s speech, I included a primer on the Fed Funds rate curve. Specifically, it explained how the curve is pricing in negative rates. Markets had another trading day to digest the Chairman’s disavowal of negative rates, so I thought it important to update those findings.

The chart below shows the Fed Funds futures prices using current prices (green), yesterday’s (orange), Tuesday’s (blue) and last week’s (orange). As with other fixed income instruments, higher prices reflect lower yields. In the case of Fed Funds futures, they are quoted as a percentage of the face value of the contract. The yield is the difference between 100 and the specific futures price, annualized. If one is paying more than 100 for a future, you would be receiving less in the future than you pay today. That implies a negative yield.

We can see that Fed Funds futures traders are still pricing in negative rates, though the timing has been pushed back from November 2020 to April-May 2021. Interestingly, they are predicting slightly lower rates (higher prices) into 2022 than the prior estimate.

In general, the futures market remains at odds with the Fed Chairman, and implicitly tells a vastly less optimistic economic story than equity markets.

(Click on image to enlarge)