One week from tomorrow on Wednesday, December 14, 2016, the FOMC will conclude their meeting and announce whether or not they are moving their target zone for Fed Funds and if so, by how much. Additionally, they will give guidance as to what they expect to do in the future. The Fed Fund Futures, according to the CME FedWatch tool, are currently pricing in a 97% chance of a 25 basis point move for the target, which is currently 25-50 basis points to a new target range of 50-75 basis points. There doesn’t seem to be a trade in the December Futures that makes sense but perhaps there is something down the road. Will the Fed announce something that would change market expectations for 2017?
A table of the probabilities that the Fed would hike interest rates in the February, March, May, June and July meeting was displayed. The table showed that the Fed is starting to price in another hike in the early part of 2017. A graph of the /ZQF7 - /ZQF8 (January 2017-January 2018) Fed Fund Futures spread was displayed. The graph showed that the Fed Funds Futures are currently pricing in a 43 bps hike for 2017 and that the market expects there to be a little less than two hikes for the year. Tom added, “The marketplace is predictive and incredibly accurate, the Fed is reactive and sometimes the Fed tries to control the market, but they can't.”
A table of a trade idea in Fed Fund Futures, if a trader was hawkish or dovish on interest rates was displayed. Traders thinking that the Fed will hike more than twice in 2017 would BUY the /ZQF7−/ZQF8 spread while those wanting to bet on the opposite would sell the spread.
For more information about the Probabilities and The Fed see:
Market Measures from September 17, 2015: “Pending Fed Decision”
Options Jive from June 17, 2016: "Probabilities of Fed Action"
Options Jive from September 21, 2016: "Probabilities Around the Fed"
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for a better understanding of what the market expects interest rates to do for the rest of this year, next year and an idea about how to possibly trade those expectations.
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