Fed Funds Futures

MacroVar monitors the Fed fund futures market and provides analytics and data on the dynamics. Fed funds futures is a very important tool to monitor market expectations for central bank monetary policy (rate hikes/cuts), financial markets and economic outlook.

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Fed Fund futures active contracts

What Are Fed Funds futures

Fed Funds Futures are financial derivatives contracts that allow market participants to speculate on or hedge against future changes in the Federal Funds Rate. The Federal Funds Rate is the interest rate at which depository institutions (such as banks and credit unions) lend reserve balances to other depository institutions overnight in the United States. It is a key short-term interest rate that influences borrowing and lending rates throughout the economy.

Here are the key components and characteristics of Fed Funds Futures:

1. Underlying Asset: The underlying asset for Fed Funds Futures is the effective Federal Funds Rate, which is the average rate at which banks lend to one another in the federal funds market.
2. Contract Size: Each Fed Funds Futures contract typically represents a notional amount of $5 million.
3. Settlement Period: Fed Funds Futures contracts are settled monthly, with each contract corresponding to a specific month in the future.
4. Pricing: The price of a Fed Funds Futures contract is quoted as 100 minus the expected future Federal Funds Rate. For example, if the futures price is 99.50, it implies an expected Federal Funds Rate of 0.50%. If it’s 99.75, it implies a rate of 0.25%. The price reflects market expectations for the Federal Funds Rate at the contract’s expiration.
5. Trading and Expiration: Fed Funds Futures contracts trade on various futures exchanges, such as the Chicago Mercantile Exchange (CME). They have specific expiration dates, usually on the last business day of the contract month.
6. Settlement: Settlement of Fed Funds Futures is in cash. The profit or loss for the holder of a contract is determined by the difference between the futures price at which they entered the contract and the effective Federal Funds Rate on the contract’s expiration date.
7. Hedging and Speculation: Market participants use Fed Funds Futures for different purposes. Banks and financial institutions may use them to hedge interest rate risk in their portfolios, while speculators may trade them to profit from interest rate movements or to express a view on the direction of monetary policy.
8. Connection to Monetary Policy: Changes in the Federal Funds Rate are typically determined by the Federal Reserve as a tool to implement monetary policy. Therefore, Fed Funds Futures can be used as an indicator of market expectations regarding future monetary policy actions by the central bank.

Fed Funds Futures are an important tool for market participants and policymakers to gauge market sentiment about future interest rate movements. They are often used in conjunction with other interest rate derivatives to manage and mitigate interest rate risk in financial markets.

Interpreting the Fed Funds Forward Curve dynamics