How the Fed Affects Interest Rates


Last week, the Federal Open Market Committee held their fourth meeting of the year where they hiked the Federal Funds Rate – a benchmark for short-term interest rates in the US – by 0.75% (75 bps); this was the largest hike by the Fed in more than 20 years.* So why did it send interest rates lower?

S2Y Small 2YR Yield Futures Historical Prices

Source: dxFeed (https://dxfeed.com)

While the Fed only directly affects the Fed Funds Rate, changes made to that interest rate can affect popular interest rate trading markets like US Treasuries. However, on June 15, 2022 – the day the Fed hiked rates by 0.75% – Small 2YR US Treasury Yield (S2Y) futures fell by the equivalent of -0.23% in 2YR US Treasury interest rates, which are often highly correlated with Fed Funds Rates.

If the Fed is one of the most influential voices in interest rate pricing, then how can interest rate markets move lower on the actual day that the Fed hiked rates? Futures and options have a time component that requires traders to think steps ahead, and you can see by the price action in S2Y futures leading up to the actual event that this hike had been priced in for a while.

Interest Rate Futures: How They Work

On days when the Fed isn’t hiking or cutting rates, interest rate futures largely move based on where traders think rates are headed. You can think of the day-to-day interest rate price action as efficiently getting closer and closer to what the Fed will do in the future, and this process is informed by employment data, inflation data, the state of the stock market, and more. For example, Small 2YR Yield futures rose the equivalent of +2.40% from January 1, 2022, to the Fed Rate Hike Day last Wednesday, while the Fed has only hiked rates 1.50% in the same time. The difference is owing to future rate hikes already priced into the market.

Interest Rate Price Action

Market Symbol Start of Year to Fed Rate Hike Day Fed Rate Hike Day
Small 2YR Yield Futures S2Y +24.00 (+2.40%) -2.30 (-0.23%)
Small 10YR Yield Futures S10Y +16.50 (+1.65%) -1.90 (-0.19%)
Small 20YR Yield Futures S30Y +15.00 (+1.50%) -0.90 (-0.09%)

Source: dxFeed (https://dxfeed.com)

What to Expect from The Fed

The move lower in rates coming out of the Fed meeting owed to Fed Chair Powell’s talking down of large rate hikes in the future. Though projections still state that the Fed will continue to move Fed Funds Rates higher, those projections came down slightly after Powell’s press conference.

Interest Rate Projections for End of 2022

Values taken on 6/17/22 Source: CME Group (https://cmegroup.com)

Derivatives trading can seem daunting at times given that you must be positioning yourself for what’s next, but the question in rates seems pretty straightforward: Do you buy into the mania of much higher interest rates being required to quell inflation (buy S2Y), or do you think the inflation madness has peaked and rates will revert (sell S2Y)?

*Source: The Federal Reserve (https://federalreserve.gov)

To learn more about how the Small Exchange is merging the efficiency of futures with the clarity of stocks, make sure to subscribe to their YouTube channel and follow them on Twitter so you never miss an update.

© 2022 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, not intended as a recommendation, and does not contend to address the financial objectives, situation, or specific needs of any individual investor.  The information presented here is for illustrative purposes only and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Trading in derivatives and other financial instruments involves risk.

New call-to-action





Source link

Related articles

NaaS Know-how, Inc. (NAAS) This fall 2023 Earnings Name Transcript

NaaS Know-how, Inc. (NASDAQ:NAAS) This fall 2023 Earnings Convention Name March 28, 2024 7:00 AM ET Firm Individuals John Wang - Director, IRCathy Wang Yang - CEOWu Ye - Chief Technique OfficerAlex Wu...

Ethereum Worth Gearing For One other Elevate-Off to $4K: Improve Is not Over But

Ethereum worth is holding beneficial...

USD/JPY, EUR/JPY, GBP/JPY at Vital Juncture

This text focuses totally on the technical outlook for the yen. For a deeper understanding of the basic components driving the Japanese foreign money's trajectory within the second quarter, be happy to obtain...

Cathie Wooden’s ARK buys over $14M in Tesla inventory, sells Coinbase in newest trades By Investing.com

Cathie Wooden's ARK ETFs have made important strikes within the inventory market on Thursday, March twenty eighth, 2024, with Tesla Inc (NASDAQ:) and Coinbase International Inc (NASDAQ:) being the centerpieces of...

Apple sues former iOS engineer for allegedly leaking Imaginative and prescient Professional, Journal app particulars

Apple is suing a former worker for leaking confidential info, together with unknown particulars about Apple’s Journal app, the event of the VisionOS headset, and extra, to journalists and staff of different corporations....
spot_img

Latest articles

LEAVE A REPLY

Please enter your comment!
Please enter your name here