Interest-rate futures traders will no longer have a clear-cut calendar date to help them position bets on the timing of the Federal Reserve's first policy rate increase.
The central bank announced Wednesday it will use economic thresholds to guide policy, instead of its previous method of tying the rate move to a calendar timeframe, last at mid-2015. The new parameters lay out intentions to keep the rate on hold if the unemployment rate is above 6.5%, as long as inflation expectations don't exceed 2.5%.
While investors are still digesting this new rate regime, it already prompted some to bet the central bank will end up raising rates before its previously stated mid-2015.
The February 2015 Fed Funds futures contract implied a 2% chance of a 0.25 percentage point increase at the Fed's early-2015 meeting. That is up from zero odds reflected over the past two weeks. The thinly traded July 2015 contract implied a 32% chance, from 30% at the start of the week.
The December 2014 contract priced in a rate 16.5 basis points above the rate priced into the December 2013 contract, up slightly from a 14.5 spread Tuesday, reflecting expectations for short-term rates to increase at a somewhat-faster pace.
Write to Cynthia Lin at [email protected]
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The central bank announced Wednesday it will use economic thresholds to guide policy, instead of its previous method of tying the rate move to a calendar timeframe, last at mid-2015. The new parameters lay out intentions to keep the rate on hold if the unemployment rate is above 6.5%, as long as inflation expectations don't exceed 2.5%.
While investors are still digesting this new rate regime, it already prompted some to bet the central bank will end up raising rates before its previously stated mid-2015.
The February 2015 Fed Funds futures contract implied a 2% chance of a 0.25 percentage point increase at the Fed's early-2015 meeting. That is up from zero odds reflected over the past two weeks. The thinly traded July 2015 contract implied a 32% chance, from 30% at the start of the week.
The December 2014 contract priced in a rate 16.5 basis points above the rate priced into the December 2013 contract, up slightly from a 14.5 spread Tuesday, reflecting expectations for short-term rates to increase at a somewhat-faster pace.
Write to Cynthia Lin at [email protected]
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