What Are Fed Funds Futures?

Fed funds futures are financial futures contracts based on the 澳洲幸运5官方开奖结果体彩网:federal funds rate and traded on the Chicago Mercantile Exchange (CME) operated by CME Group Inc. (CME). The federal funds rate is the rate banks charge each other for overnight lo🍷ans of 🎃reserves on deposit with the Federal Reserve.

The Fed uses the federal funds rate to control U.S. money supply and influence the cost of credit throughout the economy. The prices of fed funds futures reflect market expectations about future changes in the fed funds rate based on the target ranges the Fed sets as a key tool of its 澳洲幸运5官方开奖结果体彩网:monetary policy. 

Understanding Fed Funds Futures

As the shortest-term risk-free interest rate, the federal funds rate sets the floor for other interest rates throughout the ꩵeconomy. Increases in the fed funds rate raise borrowing costs for a wide variety of new loans of all types an🌃d existing variable-rate loans and drive up bond yields.

Conversely, when the fed fun꧅ds rate drops, other interest rates tend to decline as well. Lower interest rates promote faster economic growth, while 🃏higher ones often slow it.

Banks and fixed-income portfolio managers use fed funds futures to hedge against market fluctuations in short-term interest rates. The contracts also let traders speculate on the 澳洲幸运5官方开奖结果体彩网:Federal Open Market Committee's monetary policy announcements.

Contract Specifications

CME's 30-day fed funds futures are monthly contracts listed for 60 consecutive months and 澳洲幸运5官方开奖结果体彩网:cash-settled on the last business day of every month. The CME also lists options on fed funds futures contracts expiring within two years.

The 30-day fed funds futures' contract price is the arithmetic average of the daily effective federal funds rates during the contract month as reported by the Federal Reserve Bank of New York, subtracted from 100. So if the effective fed funds rate were to average 1.75% for a given month, the settlement price of the fed funds futures contract expiring that month would be 100 - 1.75 = 98.25.

The minimum 澳洲幸运5官方开奖结果体彩网:contract size is expressed in U.S. dollars by multiplying the contract price by $4,167. In the example above, it would be 98.25 x $4,167 = $409,407.75.

Options on the fed funds futures contracts are American-style, meaning they can be exercised on any business day prior to expiration.

Fed Funds Futures As Rate Hike Odds

The prices of fed funds futures expiring after⛎ FOMC meetings not yet held reflect the market expectations for the outcome of those meetings in terms of 🤪federal funds rate targets.

Those market prices can be expressed as probabilities of rate hikes (or cuts) of a given size at those meetings, and CME's Fed Watch Tool provides these.

It is important to understand that t🌜he probab﷽ilities reflect not the objective likelihood of a given outcome but rather current market odds as expressed in fed funds futures trading.

For example, the fed funds futures contract expiring in July 2024 indicated a 95.9% chance that the Federal Reserve would keep rates at 525-550 basis points during the July 31, 2024, FOMC meeting. The remaining 4.1% suggested a possible rate cut to 500-525 basis points.

This marked an increase from the April 2024 futures contracts, which had shown a 77.23% probability that rates would remain unchanged by the end of the July FOMC meeting.

The Bottom Line

Fed funds futures are 🍸a tool used by traders and institutions to he💜dge or bet on changes in the federal funds rate, which is key to U.S. monetary policy. Traded on the Chicago Mercantile Exchange, these futures reflect market expectations for interest rate changes, especially before federal reserve meetings. They help predict potential rate hikes or cuts, influencing borrowing costs and overall economic growth.