Monday, December 19, 2016

Markets, Not Fed Behind The Curve

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*2017 Fed Funds Futures are not forecasting as many rate hikes as the Fed called for last week.

*That could mean that the market is still in disbelief and markets still need to "price in" more hikes.

*The more hikes that are needed the more risk markets have.

The Fed raised their Fed Funds targets for 2017 at last Wednesday's FOMC meeting. The market still hasn't caught up to the Fed's projections. As the market comes to the reality that 2017 is going to be different than 2016 more risk needs to be priced in to markets (NYSEARCA:SPY).
Market Not Pricing In Enough Hikes For 2017
Source: Interactive Brokers
Above is the December 2017 Fed Funds Future. Currently it's priced at 98.845. The future is priced 100 minus the expected rate at that time. The market is pricing in Fed funds rates to be 1.155% by December 2017. That is exactly one 25bp hike away from the Fed's new target of 1.4% by December 2017.

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