To Inform:

This past Wednesday the Fed met for the second meeting of new Fed Chair Kevin Warsh’s term and chose to keep short term interest rates unchanged at the 3.75% upper bound. It is worth noting keeping rates unchanged was not a slam dunk. Odds based on Fed Funds futures were 66% in favor of no change, but 34% in favor of a hike. The bigger odds did win out, but three Fed governors dissented from the “no change” decision, wanting the Fed to hike now.

So, I just made a big technical sounding statement – “odds based on Fed Funds futures” – what does that really mean? Let’s explain and then get practical in applying the concept.

Fed Funds futures are financial derivative contracts, traded on the Chicago Mercantile Exchange (CME), which allow investors to speculate on, or hedge against, future changes in the U.S. federal funds rate.

Practically, trading and pricing of Fed Funds futures gives us insight into what action the market expects the Fed will take. And because the data is based on actual market transactions, Fed Funds futures are often deemed more reliable when looking at the future than more emotional survey data.

The Chicago Mercantile Exchange (CME) has a tool called the “CME FedWatch” (FedWatch – CME Group) which shows the percentage likelihood of what the Fed will do at upcoming meetings. So, what is the FedWatch tool showing for the next meeting on September 16? As you can see in the chart below, odds currently favor a hike – 65% for a 0.25% increase vs. odds of 35% for no change.

Source: CME FedWatch

Looking out further to December, the market is pricing in the probability of more hikes, with over 87% odds that short-term interest rates will be higher than today.

Source: CME FedWatch

It’s worth noting that Alex Durbin, Chief Investment Officer for The Joseph Group, thinks the probability of the Fed hiking rates is currently overstated. According to Alex, “not only do we have a new Fed Chair who the market is trying to figure out, but the current inflationary problems (i.e., higher oil prices due to the war) are not likely to be solved by increasing short term rates.”

Every Monday, The Joseph Group has an 11:30 a.m. Investment Communications meeting with all our advisors and looking at the CME Fed Watch tool is often part of the meeting.

When it comes to keeping clients informed of how we may shift portfolios in the weeks and months ahead, we have a couple of great opportunities coming up. On August 19, Alex and I will be hosting a Portfolios at Your Place Zoom event where we will walk through the current market environment in the context of the Harvest risk-managed growth portfolio we have the privilege of managing for clients. Then, on September 16 (the day of the next Fed meeting!), we will host our annual Oktoberfest Portfolios & Pints, pulling questions out of a hat event at the Hofbrauhaus here in Columbus. As always, we would love to see you at either or both of these events and please invite a friend!

Written by Travis Upton, Partner and CEO