Afternoon Edition 8.6.2019
There are many arcane parts of the global financial system which sophistical investors watch and non-sophisticated investors do not. One of the goals of these updates is to shed lights on these dark corners of the global financial system, bring them into the light and help traders on our platforms understand what other market participants in other financial markets think about the figure.
One such dark corner is the market for “futures” of the Fed Funds rate. Futures are financial instruments that look to some future price or event. The Fed Funds rate is the overnight bank lending rate which US banks charge each other for overnight lending and borrowing to / from each other. It is the called the Fed Funds rate because the US Federal Reserve directly manipulates this interest rate by adding supply or demand via adding or subtracting US Treasury instruments, cash or other instruments into that market.
The Fed Funds futures contract for December 2019 is currently inferring that the average for the overnight US lending / borrowing rate will be only 1.56%, substantially below the current target rate set by the US central bank (The Fed) of 2%-2.25% (or a midrange of 2.125%). Skipping “the math” how this is derived (email us if you really want to know), the investors of the December 2019 contract for the Fed Funds rate are implying that by December 11 there is a 95% chance the US central bank will have cut interest rates down to 1.50%-1.75% and a 5% chance the US central bank will have cut rates down to 1.25%-1.50%.
This implies that these investors believe the US Federal Reserve may be having to act either to stabilize the US economy or US financial markets or both. For those investors seeking assets not correlated to US equities, they may want to consider an allocation to digital assets such as cryptocurrencies as part of their overall investment portfolio.
Tim Shaler is Chief Economist of iTrust Capital. He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.
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