Forecasting the Federal Funds Rate
July 10, 2007
The Federal Funds rate is the most closely monitored rate set by the Federal Reserve. Economists and Fed watchers will make predictions about the future of the benchmark rate after nearly every economic release. Typically, the language in the statements released by the Fed is not enough to give a clear indication of how the Fed will react at future meetings and to different economic scenarios. Because any change in the Fed Funds rate has a ripple effect of changing bank prime rates, credit card rates, home equity loand rates, and short-term deposit rates any clear indication of the direction of the Fed Funds rate is invaluable for investing and personal finance decisions.
The Chicago Board of Trade (CBOT) trades futures contracts on the 30 Day Federal Funds (ZQ) with expirations going forward for the next 8 months. These futures contracts trade such that the implied yield of the Fed Funds Rate (100 - current price of contract) can be determined for each expiration. Listed below are the implied yields of the 8 contracts currently being traded on the CBOT:
current Federal Funds rate = 5.25% (as of July 10th, 2007)
July 2007 5.250%
August 2007 5.245%
September 2007 5.240%
October 2007 5.236%
November 2007 5.225%
December 2007 5.215%
January 2008 5.200%
February 2008 5.190%
The quotes above are available from the CBOT's web site daily.
