When you see the the CBOT listing the Fed Funds Futures Rate pricing contained by a 50 bp increase. How do you figure this out from the CBOT information?
"Futures on the Chicago Board of Trade showed a 58 percent chance yesterday the Fed will incline its 2 percent target rate for overnight lending between bank by at least a quarter point at its Aug. 5 assignation, compared with 32 percent the previous sunshine. The contracts showed a 96 percent chance the Fed will increase the rate by December, up from 60 percent likelihood a week ago." Bloomberg
Answers: What they are looking at is the futures price of the Fed Funds contract on the CBOT. Today, the August contract closed at 97.865. Take 100, subtract the price, and you get the interest rate...which surrounded by this case is 2.135%. The rate today is 2%. The expected rate within August is 2.135%, 0.135% higher than today. All they are doing is taking the expected increase / .25% to come up near a percentage. So take .135/.25 = 54% within this case. That assumes the bump comes within June. The Fed Funds contract takes the average rate for the entire month, so you could assume 25 justification points on Aug 5, which would give a better percentage. Also, there is probably a possibility of a 50 proof point move included. I don't know how they are coming up with the 96%. The closing price contained by December is 97.41, indicating 2.59%. That says the market are expecting the Fed Funds rate to be 2.59% by December, an increase of 0.59% from today. The link below is 20 mins delayed...if the market have open by the time you read this, the prices may be different than what I posted. Personally, I'd use the futures prices as a indicator of where to expect rates. The percentage quoted in profusely of articles seem arbitrary to me.
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"Futures on the Chicago Board of Trade showed a 58 percent chance yesterday the Fed will incline its 2 percent target rate for overnight lending between bank by at least a quarter point at its Aug. 5 assignation, compared with 32 percent the previous sunshine. The contracts showed a 96 percent chance the Fed will increase the rate by December, up from 60 percent likelihood a week ago." Bloomberg
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Answers: What they are looking at is the futures price of the Fed Funds contract on the CBOT. Today, the August contract closed at 97.865. Take 100, subtract the price, and you get the interest rate...which surrounded by this case is 2.135%. The rate today is 2%. The expected rate within August is 2.135%, 0.135% higher than today. All they are doing is taking the expected increase / .25% to come up near a percentage. So take .135/.25 = 54% within this case. That assumes the bump comes within June. The Fed Funds contract takes the average rate for the entire month, so you could assume 25 justification points on Aug 5, which would give a better percentage. Also, there is probably a possibility of a 50 proof point move included. I don't know how they are coming up with the 96%. The closing price contained by December is 97.41, indicating 2.59%. That says the market are expecting the Fed Funds rate to be 2.59% by December, an increase of 0.59% from today. The link below is 20 mins delayed...if the market have open by the time you read this, the prices may be different than what I posted. Personally, I'd use the futures prices as a indicator of where to expect rates. The percentage quoted in profusely of articles seem arbitrary to me.
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