Re: Fed Funds and probability of hike rate

["Lionel Issen" <lissen@xxxxxxxxx>]

Glen:

Thanks. I couldn't find my own error.
Lionel Issen
lissen@xxxxxxxxx
----- Original Message -----
From: Glen Wallace <gcwallace@xxxxxxxx>
To: MetaStock listserver <metastock@xxxxxxxxxxxxx>
Sent: Saturday, June 17, 2000 8:44 PM
Subject: Re: Fed Funds and probability of hike rate


>
> I think you slipped a digit, Lionel.  0.9450-0.94435 is 0.00065, not 0.065
>
>
> ----- Original Message -----
> From: "Lionel Issen" <lissen@xxxxxxxxx>
> To: <metastock@xxxxxxxxxxxxx>
> Sent: Friday, June 16, 2000 10:42 AM
> Subject: Re: Fed Funds and probability of hike rate
>
> > Glen:
> > Please clarify the math for me. when I put in the correct decimal values
> > instead of points or percents I get 26. This is 2600 percent.
> >
> > (0.9450-0.94435)/(0.9450-0.9425) =0.065/0.0025 = 26 or 2600%
> > Lionel Issen
> > lissen@xxxxxxxxx
> >
> >
> > ----- Original Message -----
> > From: Glen Wallace <gcwallace@xxxxxxxx>
> > To: MetaStock listserver <metastock@xxxxxxxxxxxxx>
> > Sent: Friday, June 16, 2000 9:40 AM
> > Subject: Fw: Fed Funds and probability of hike rate
> >
> > > I thought this would be of interest here.  A small error in the math,
but
> > > the logic holds.  Forwarded with permission ....
> > >
> > >
> > > > Alberto -
> > > >
> > > > That is my specialty. In fact, there is a good chance that the quote
> > > > came from me or an acquaintance of mine, Jim Bianco, especially if
> > > > it was Bridge News.
> > > >
> > > > The whole calculation can be complex, but in this case it is pretty
> > > > simple.  The July futures trade at 94.435. Since there is no meeting
> > > > in July, if the Fed leaves the funds rate unchanged, fair value for
the
> > > > contract is 94.50.  If the Fed increases on 28-June, the fair value
is
> > > > 94.25. We get this by subtracting the funds rate from 100. The
> > > > current rate is 6.50%. A 25 basis point hike would be 6.75%. The
> > > > current odds then are (94.50-94.435)/(94.50-94.25) =6.5/25.0
> > > > = 26%.
> > > >
> > > > The calculation is somewhat more complex if there is a meeting
> > > > during the month, and it is more complex when there are multiple
> > > > meetings since you have to get into conditional probabilities, but
in
> > > > this case, it is absolutely correct.
> > > >
> > > > By the way, I have spoken with Fed officials, and they watch this
> > > > number closely and compute the odds in exactly this manner, to
> > > > see what the market is thinking. The funds futures measure WHAT
> > > > THE MARKET THINKS THAT THE FED WILL DO. If the
> > > > Fed does not want to surprise the market, that is what they
> > > > will do. The contract has been correct for something like 30
straight
> > > > meeting. Based on where it is now, the Fed will not increase in
June.
> > > >
> > > > Steve Poser
> > > > ---
> > > > Steven W. Poser, President
> > > > Poser Global Market Strategies Inc.
> > > > http://www.poserglobal.com
> > > > swp@xxxxxxxxxxxxxxx
> > > > Tel: 201-995-0845
> > > > Fax: 201-995-0846
> > > >
> > > >
> > > >
> > > > Realtraders,
> > > >
> > > > Here is an excerpt taken from a news agency some days ago:
> > > >
> > > >  >"Prices of July Fed Funds reflect a 48% chance of a 25bps rate
hike at
> > > >  >the June 27/28 meeting. That probability is almost 30% higher than
> > > >  >what was prices in after last week May payroll data."
> > > >
> > > > What's the calculation to extrapolate the probability of a FED hike
from
> > > > the July Fed Fund price?
> > > >
> > > > Thanks for your comments.
> > > >
> > > > Regards,
> > > > Alberto
>