The Market doesn't care about the FED - Do You?

in #federealreserve3 years ago

Dear Steemit community,

the "almighty" Federal Reserve has hiked interest rates by a quarter of a percentage point four times in 2018.
Interest rates should now be higher than a year before, right?

Well, it seems like the market for short term interest rates, represented by the Eurodollar futures contract (ticker symbol: /GE), doesn't care about the Fed, since it has now reversed all four rate hikes of 2018, as you can see in the following chart.

Eurodollarfutures Chart 2018 (weiß + alle Anmerkungen).png

chart source: TOS trading platform

Let's give it a closer look:
The Eurodollar futures contract is an instrument which should be very sensitive to rate hikes by the Fed, since it is a derivative of the expected 3 month interest rate (LIBOR rate for USD) on USD deposits held in bank accounts outside the US.
Eurodollar futures are quoted as 100 less the 3 months LIBOR rate.
(e.g. a price of 97 equals an interest rate of 3%).

So if the FED had the power to steer the markets for interest rates, the price of the Eurodollar future should go down when the Fed hikes rates and up when the FED lowers rates.

In 2018 the FED hiked rates 4 times. Every time by a quarter of a percentage point. Therefore the price of the Eurodollar futures contract should now be a point lower as before the rate hikes.

On March the 21st, 2018, a day before the first rate hike in 2018, the price of the Eurodollar future (ticker symbol: /GE[H19]) was 97.33.
So the market had priced in a short term interest rate of 2.67%.
The FED funds rate at this time was 1.5%.
The FED hiked rates by 0.25% on March 22nd and did the same three more times in 2018.
A believer in the mighty FED would think that by the end of 2018 the price of the Eurodollar future should be 96.33, implying an interest rate of 3.67% (a point higher than before the 4 four hikes).

On the last trading day of 2018 (December 31) the price of the Eurodollar future was 97.29 implying an interest rate of 2.71% (100 - 97.29).

On January 31, 2019 the price of the Eurodollar future closed at 97.35, implying an interest rate of 2.65%.
So short term interest rates are now lower than before the four 2018 rate hikes.
A clear sign that it is the market who sets the interest rates and not the FED.

So stop believing in the almighty Federal Reserve and start believing in the power of free markets.

Stephan Haller, author of:
Cover.jpg

and

Cover (schwarz) klein.png

Sort:  

Sehr aufschlussreicher Artikel.

So stop believing in the almighty Federal Reserve and start believing in the power of free markets.

Das mit dem Glauben ist so eine Sache. Man glaubt ja auch, das Geld einen speziellen und festen Anker braucht, obwohl ein variabler Anker, also dynamische Anker, jede starre statische Konstruktion schlägt. Naturgesetze werden nie gerne gesehen, daher plädieren die Meisten für künstlich gesetzte Gesetze und sind der Auffassung, dass alles planbar ist.

Als Bautechniker wissen wir, dass eine Brücke auf einer Seite ein bewegliches Lager braucht, ansonsten reißt es irgendwo.
Andre Kostolany hat immer gesagt:

Ein Goldstandard ist, als ob man den Fußball auf den Rasen festnagelt.

...dass eine Brücke auf einer Seite ein bewegliches Lager braucht, ansonsten reißt es irgendwo.

Auch zwischen Trog und Stütze wird ein dämpfendes Lager eingebaut und nicht starr mit der Stütze verbunden. Also auch hier wird kein Fußball auf den Rasen genagelt.

Congratulations @stehaller! You have completed the following achievement on the Steem blockchain and have been rewarded with new badge(s) :

You published more than 300 posts. Your next target is to reach 350 posts.

Click here to view your Board
If you no longer want to receive notifications, reply to this comment with the word STOP

To support your work, I also upvoted your post!

Support SteemitBoard's project! Vote for its witness and get one more award!