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       #Post#: 325--------------------------------------------------
        Target Range for Fed Funds, Not a Fixed Point
       By: Marc Chandler Date: March 7, 2015, 5:17 am
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       A key shift at the Federal Reserve that many in the market have
       not grasped is that the Fed funds target is a range now not a
       fixed point as in the past.  Yet many continue to calculate fair
       value for the Fed funds futures contract the same way they did
       previously.
       The current target is 0-25 bp.  The effective average, which is
       what the Fed funds futures contract is linked, has been
       averaging around 12 bp, near the middle of its range. The
       effective average is weighted by volume.
       Suppose the Fed were to hike rates.  The new range would be
       25-50 bp.   Assuming a hike in June, the effective Fed funds
       rate may average 37 bp in July.  There is a meeting July 28-29,
       back-to-back rate hikes would be unreasonable to expect.  The
       implied yield of the July Fed funds futures is 24 bp and with
       the August contract at 29 bp.
  HTML http://4.bp.blogspot.com/-vLZVaqF_gcM/VPnX0ftj_hI/AAAAAAAAPes/ZDRX3LI9QeI/s1600/dexter.jpg
       Looking further out, consider the December Fed funds futures
       contract.  It implies a yield of 56.5 bp.  If the first hike
       brings the fair value to around 37 bp, a second hike would bring
       fair value to about 62 bp.  Again, this assumes that the
       effective rate averages around the middle of the Fed's range.
       This would suggest the market is discounting not only one hike
       but 80% (20 bp) of a second hike.
       Market participants can not be confident that the effective Fed
       funds rate will average around the middle of the target range.
       For the purposes of this exercise, we assumed the middle of the
       range as the neutral assumption and note that that is about the
       effective Fed funds current average. Owing to the element of
       uncertainty injected by the Federal Reserve's adoption of a
       range rather than a point target, there is good reason to expect
       somewhat higher volatility for contracts that are pegged
       to the effective Fed funds rate.
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