As sometimes happens at the Economist Intelligence Unit, a casual chat around the teakettle in the office kitchen veered from the weather to a serious debate about monetary policy—specifically, the timing of the first Fed rate hike.
Officially, the EIU forecasts that the US central bank will begin to raise rates in the third quarter this year, with its key policy rate reaching 1% by the end of 2010, from a current target range of 0-0.25%. As the tea steeped, assorted analysts and editors mulled the cases for earlier or later hikes.
Instead of a chart, today’s post serves as a pointer to follow the action in August 2010 futures contracts on the federal funds rate after tomorrow’s closely-watched employment report is released. The strength of economic recovery will, naturally, guide central bankers’ policy decisions. Futures markets are currently pricing in a good chance of a hike at the Fed’s August meeting, so trading in that month’s contract will be telling. Roughly speaking, the lower the settlement price, the greater the probability of a hike. (An explanation of how to predict interest rates from futures prices can be found here.)