Interbank Market News Scan: What the fed funds futures market is telling me …

The Federal Reserve Discount Window rate is up to 5.25% after the Federal Open Market Committee decided yesterday to increase its fed funds target range to 5.00% to 5.25%. At this writing, the Federal Funds Futures quote is 95.31 which reflects an average effective fed funds rate of 4.69%. Given that the target range was just raised, the betting markets may be experiencing a bit of a lag.

This snapshot alone would give the impression that the markets are expecting a reversal in the EFFR. Maybe the markets are expecting a weak jobs situation repot tomorrow indicating some hiring slowdown and increasing the necessity for a fed pivot.

Meanwhile, both the Board of Governors-Federal Reserve System and the U.S. Department of the Treasury are reporting that the yield on the ten-year Treasury notes are lower than the yields on the two-year notes. The further out into time, the riskier the investment so I would expect a reversal in the yields that the market is seeing.

I will have to delve deeper into how the Government is responding to the 25-basis point increase in the fed funds target range and the apparent inversion in Treasury yields. I did not expect anything out of the Biden-Harris administration, although the Council of Economic Advisors discussed yield curves on issued debt as part of the CEA’s assessment of the debt ceiling. The CEA noted in a recent report that increased yields are indicating stress in the debt markets.

Expect an in-depth analysis tomorrow after release of the U.S. Bureau of Labor Statistic’s Jobs Situation Report.

Alton Drew

4 May 2023

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