Fed Funds Forward curve

MacroVar analyses the Fed funds forward curve to monitor the market’s expectations for the Federal reserve’s future monetary policy actions (rate hikes/cuts) depending on the current dynamics of financial markets and macroeconomic indicators.

Currently the Fed Funds forward curve shows a peak of interest rates in the first quarter of 2024, and a steady reduction in FED rates.

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MacroVar presents the current shape of the Fed Funds curve compared to the Fed Funds curve in previous periods (1 week ago, 1month, 3 months, 6 months and 1 year). The shape of the Fed Funds forward curve which is assembled from Fed Fund futures provides estimates of the assumed path for the specific reference periods.

What is the Fed Funds forward curve

The Fed Funds forward curve, also known as the Federal Funds rate forward curve, is a graphical representation of the expected future path of the Federal Funds rate, which is the interest rate at which depository institutions (banks) lend reserve balances to other banks overnight. The Federal Funds rate is a key policy tool used by the Federal Reserve, the central bank of the United States, to influence monetary policy and manage the economy.

Fed Funds futures curve

The Fed Funds forward curve is typically plotted as a series of data points that show the expected future Federal Funds rates at different points in time. These data points are derived from the prices of various financial instruments, such as Eurodollar futures contracts or interest rate swaps, which reflect market expectations for future interest rates.

The shape of the Fed Funds forward curve can provide insights into market expectations regarding the future direction of monetary policy. For example:

  1. Normal Curve: In a normal economic environment, the Fed Funds forward curve is typically upward-sloping, meaning that the expected interest rates in the future are higher than the current rates. This shape reflects the expectation that the central bank will raise interest rates over time to combat inflation or manage economic growth.
  2. Inverted Curve: An inverted Fed Funds forward curve occurs when the expected future interest rates are lower than the current rates. This shape can signal market expectations of an economic downturn or that the central bank may need to cut rates in the future to stimulate economic growth.
  3. Flat Curve: A flat Fed Funds forward curve suggests that the market expects interest rates to remain relatively stable in the future. This might indicate a period of economic stability or uncertainty about the future path of interest rates.

The Fed Funds forward curve is a valuable tool for financial market participants, economists, and policymakers as it provides a snapshot of market sentiment regarding future monetary policy and economic conditions. It can also influence the pricing of various financial products and impact investment and borrowing decisions in the broader economy.