DATA VIEW: CURRENT AND PERSPECTIVE FEDERAL FUNDS RATE
Recent expectations in the media regarding Federal Reserve rate hike look a bit overblown. What the Fed is actually planning to raise is the Target Range for the Effective Federal Funds Rate.
The Effective rate, however, now trades firmly below the upper border of the range (0.25%), signalling no actual pressure to raise the Target Range.
The nature of this phenomenon is examined in detail in a 2009 NY Fed paper "Mechanics of a Graceful Exit" (newyorkfed.org/research/staff_reports/sr416.html)
One of the key conclusions from the paper is a proposition that there is just not enough demand for Federal Funds on the market to push the Effective Rate closer to the upper band of the Target Range.
It is thus very likely that the "rate hike", if there is any, will have only "media hype" effect on financial markets, while the Effective Rate can even trade below the new Target Range for some time.
The Effective rate, however, now trades firmly below the upper border of the range (0.25%), signalling no actual pressure to raise the Target Range.
The nature of this phenomenon is examined in detail in a 2009 NY Fed paper "Mechanics of a Graceful Exit" (newyorkfed.org/research/staff_reports/sr416.html)
One of the key conclusions from the paper is a proposition that there is just not enough demand for Federal Funds on the market to push the Effective Rate closer to the upper band of the Target Range.
It is thus very likely that the "rate hike", if there is any, will have only "media hype" effect on financial markets, while the Effective Rate can even trade below the new Target Range for some time.
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