One Simple Way To Forecast Fed Rate Move
The Fed funds futures change all the time as traders buy and sell contracts based on their expectations for future rate hikes.
That means with each new drip of fresh economic data, including the closely watched non-farm payrolls or inflation reports, the Fed funds futures could change, and so too could expectations for a hike in the Fed funds rate.
There’s a simple way to read the Fed funds futures and determine what traders are expecting and when they expect it. The formula: start with a basis of 100 and subtract the last price of the contract month you’re analyzing.
For example, look at the last price of the SEP 2015 contract of 99.745. Subtract it from 100 and you get 0.255. That means traders expect the federal funds rate to be at 0.25% in September.
Now look at the DEC 2015 contract and repeat the calculation: 100 – 99.585 = 0.415, or just over 0.41%. Traders expect the federal funds rate to rise by December.