How Does Reflation Look From The Point Of View Of The One Market That Gets It

Eurodollar futures are derivative, cash-settled contracts linked to 3-month LIBOR (forget about SOFR and the official hatred of this offshore dollar rate regime). Though that rate acts independently especially at the worst times (thus, the hate), it is heavily influenced by the front-end monetary alternatives set by the Federal Reserve’s monetary policy (IOER, RRP). Because of this, LIBOR kind of seems like it should reflect whatever the Federal Reserve wants; and domestic central bankers love to make it sound like this is how it works (therefore, because it doesn’t work this way, they really, really want to get rid of it).

Institutions betting and hedging in this market aren’t positioning based on what Jay Powell and models at the Fed (and other money markets) think the future might look like but instead what Jay Powell and the Fed will be forced to look at when that future gets closer. Central bankers are always, always behind.

In other words, the eurodollar futures market has, time and again, figured out what Federal Reserve monetary policy will look like long before Federal Reserve policymakers do. By the time officials understand what’s really going on, they’re following the market rather than the other way around.

This had been true, infamously, in the leadup to GFC1; the eurodollar futures curve had inverted as far back as December 2006, foretelling of truly serious problems that took Ben Bernanke’s group an entire year just to begin appreciating (while trying their best to ignore them).

And this was also the case just a few years ago; Powell declared early in 2018 how inflation and strong economic growth was going to lead to more aggressive rate hikes heading into 2019, when in the middle of 2018 the eurodollar curve inverted indicating – strongly – a growing likelihood he wouldn’t actually get much farther. As I wrote in July 2018, just after inversion first appeared:

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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