A quiet Monday morning before the Federal Open Market Committee meeting …

The Federal Open Market Committee begins its two-day meeting tomorrow with media pundits apparently wavering between the FOMC maintaining the current fed funds target range of 5.00% to 5.25% or raising the range by 25 basis points. The 30-Day Fed Funds Futures and Options quote today decreased slightly from 94.815 at 10:51 am EST to 94.805 at 5:58 pm EST. According to the CME FedWatch Tool, the market estimates an 80.4% chance that the FOMC will maintain the current fed funds target range.

The bond market looked relatively quiet, at least between 10:57 am and 5:58 pm, from the Federal Reserve’s perspective. According to interest rate data from the Board of Governors, the yield on ten-year note went from 3.73% to 3.75% while the yield on the two-year note went from 4.52% to 4.59%.

I sit in the group that sees a 19.6% chance that the FOMC increases the fed funds target range by 25 basis points to a range of 5.25% to 5.50%. For the asset-less, wage earning class, we may benefit from rate increases due to greater returns on the cash we accumulate. Also, for those of us who were able to hoard cash, falling asset prices may give us a chance to accumulate other income generating assets or purchase non-income generating assets and convert them into money makers.

(America does not have a democracy. Why does the left try to protect what does not exist? Get my book at amazon.com/author/altondrew )

For those of us who bet on price movements in the binary options markets, increased interest rates tend to mean a dollar that increases in price. The Reserve Bank of Australia‘s 7 June 2023 hike of its cash rate to 4.10% tells me that the U.S. may want to protect the strength of its currency by keeping its interest on reserve balances and discount window rates higher than Australia’s rates.

In addition, if the rest of the world sees the U.S. as a place for higher returns, the flush of capital could result in more funding for business activity in the U.S.

The downside is that higher rates may cause a decrease in business investment as borrowing costs rise. Fed chair Powell has been clear that he would like to see an uptick in the unemployment rate to around five percent.

I hope that the FOMC goes against the grain.

Alton Drew

12 June 2023

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