Perhaps the most-watched US financial benchmark — the Federal Funds target rate — is attracting significant new attention from traders as volatility returns to the US interest rate market, after a prolonged period of stable and very low rates.
FF contracts with longer terms to expiry also allow market participants to act on views as far ahead as a year where there is greater uncertainty, given that the Federal Reserve incorporates new economic data into each meeting's outcome.After a long period of interest rate stability in the wake of the global financial crisis, with a target range of 0-0.25%, the Fed announced a series of nine increases between 2015 and 2019 followed by a cut in autumn 2019.
Volume and open interest trended sharply upward, with visible spikes preceding rate changes. Even when compared to the most active periods of the low-interest era, both volume and open interest increased by around a factor of five. For 2019, average daily volume has reached nearly 400,000 contracts, with open interest around 2.2 million. Using the contract multiplier of $4,167, these numbers represent around $1.6 billion and $9 billion in notional exposure, respectively.
Over the last 15 meetings to September 2019, Fed Funds futures have priced an average around two basis points away from the target rate, with a maximum divergence of 11 bps when moves of 50-75 bps occurred regularly. The two outliers arose in January and October 2008, when the Federal Reserve made emergency cuts totaling 125 and 100 basis points for those months.
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