Futures Outlook - An Excerpt from CRB'S Futures Market Service

Fed supports market psychology with promise that rates will remain low for an “extended period”

The FOMC in its 2-day meeting that ended on Wednesday said that it would keep rates “exceptionally low” for an “extended period.” There has recently been market talk about when the Fed might drop its reference to keeping rates low for an “extended period” as a signal that the Fed is getting closer to raising rates. However, the Fed is clearly not close to considering a rate hike. The Fed is well aware that the during the Depression the central bank raised rates too soon and caused a renewed recession. The Fed is undoubtedly determined to ensure that the US economy does not end up in a double-dip recession this time around.

The outcome of the FOMC meeting was in line with market expectations and there was little change in the federal funds futures strip curve following the meeting. The market is still expecting the Fed to keep its funds rate target unchanged at zero to 0.25% at the next three meetings on Dec 15-16, Jan 26-27, and March 16. However, the market is then discounting a 30% chance of a 25 bp rate hike to 0.50% at the April 27-18 meeting and is fully discounting that rate hike by August 2010. The market is then expecting a slow rise in the funds rate to 1.00% by February 2011 and to 2.00% by August 2011.

While the markets are expecting the Fed to keep its funds rate target near zero until spring 2010, the market also expects the Fed to start slowing weaning the market off the exceptionally high levels of reserves that are in the banking system, which are currently still about $1.2 trillion above normal levels  (see above chart). The Fed last week completed its $300 billion Treasury purchase program, meaning that the Fed was at least finished with its quantitative easing program that in normal times is considered a cardinal sin against inflation. The end of  that program in itself restored some of the bond market's confidence in the Fed. The Fed has also been discussing with dealers how it can conduct large-scale reverse repo operations to absorb liquidity when the time comes. However, over the near-term, the Fed’s largesse is likely to continue, thus supporting the stock market and the commodity markets.

******************************************************************************************************************
Like what you're reading? Get a Free Trial to CRB's Futures Market Service!

This weekly publication is designed to make you a more powerful trader through the understanding of the fundamental factors moving the comodity and financial futures markets. Also included in the service is a weekly version of the highly rated CRB Futures Trend Analyzer, an automated technical trading system providing specific trade recommendations with exact market entry and exit points. Sign up today!
******************************************************************************************************************

Copyright © 1934-2008 Commodity Research Bureau, a Barchart.com, Inc. company. All rights reserved. 330 South Wells Street, Suite 612, Chicago, Illinois 60606-7110 USA • 800.621.5271 or 312.554.8456 • E-mail: info@crbtrader.com • Website: www.crbtrader.com. The information herein is compiled from public sources believed to be reliable but is not guaranteed as to its accuracy or completeness. No responsibility is assumed for the use of this material and no express or implied warranties are made. Nothing contained herein shall be construed as an offer to buy/sell, or as a solicitation to buy/sell, any security, commodity or derivatives instrument.