Interbank Market News Scan: Betting markets see the effective federal funds rate dropping and that the Fed will not hike rates.

The takeaway …

My review of the Federal Open Market Committee (FOMC) minutes from its March 2023 meeting left me with the impression that whether the Board votes to increase the fed funds rates target range on 3 May 2023 or keep the current range of 4.75% to 5.00%, this may be its last rate action for the rest of 2023.

The FOMC expects the target range of the fed funds rate to increase by 25 basis points by the end of 2023. The FOMC also expects the effective fed funds rate to fall to 3.28% by the end of 2024. This fall in the effective funds rate may have political implications for the Biden-Harris Administration. More on that later.

The current banking crisis, where regional banks are expected to come under some pressure due to deposits moving from their vaults to the vaults of larger banks or money market funds, did not have any impact on the overnight fed funds trade. The effective federal funds rate has maintained itself during the shuttering of Silicon Valley Bank and Signature Bank.

The fed funds options market appears to concur with the FOMC assessment. Between 12 April 2023 and the time of this writing on 13 April 2023, data from the CME Group reports that fed funds options quote for the April 2023 contract has held at 95.175. This tells me that the options markets expect an effective fed funds rate of 4.8275 through the end of April.

CME Group data also shows the fed funds futures quote increased from 95.12 on 12 April 2023 to 95.25 at the time of this writing. This tells me that the futures market sees an effective fed funds rate of 4.75%, a rate equal to the bottom portion of the current fed funds target range. This market may be expecting a decision not to raise rates.

Falling fed funds and interest rates through 2024 should put the Biden-Harris Administration on alert. Falling rates may be good for facilitating an increase in asset prices. Bringing higher valued collateral to a bank in exchange for credit at lower interest rates is good for business growth. But there has to be a floor where lower interest rates slow indicate a slowdown in commercial activity as rates fall in order to entice borrowing.

Over the next twelve months, as rates fall any cheerleading about an economic upturn should be tempered by a narrative that a close eye is being kept on the economy and that disciplined expenditures are being made to keep moderate winds blowing into the economy’s sails.

Today’s political narrative outlook …

It’s Thursday. This means that members of Congress are beginning their trek to the airport back to their districts. I found no hearings scheduled in either the U.S. House Committee on Financial Services or the U.S. Senate Committee on Banking, Housing, and Urban Affairs that impact the federal funds overnight markets.

Also, at the time of this writing, were there any statements out of the U.S. Treasury or the Executive Office of the President that has an impact on the overnight fed funds market …. at least for now.

Alton Drew

13 April 2023

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