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