CME Group, home to bets on Fed policy, scrambles to keep watch

These days, it seems, everyone is trying to keep up with shifting market expectations for the Federal Reserve’s monetary policies. CME Group’s Fed Watch, which delivers a snapshot of those expectations based on futures tied to the Fed’s target for short-term rates, is no exception.

Rate futures traded at CME have dived since Fed Chairman Ben Bernanke said last week that the U.S. central bank may decide to cut back on its purchases of Treasuries and mortgage-backed securities in the next few Fed policy meetings if data shows the economy is gaining traction. CME’s website dutifully translated the drop in rate futures into rising market expectations that the Fed’s first rate hike since 2008 could come in early 2015.

But the site was silent on the likelihood of the Fed raising rates any earlier – it simply didn’t include that data, because as recently as a week ago, the probabilities of a rate hike in 2014 were close to zero. Bernanke’s comments, and some strong data, changed all that. By Wednesday, CME had caught up, adding data on meetings in the second half of 2014. Just in the nick of time: by the day’s end, traders were pricing in a rate hike at the Fed’s December 2014 meeting.

Fed makes low rates vow, but traders afraid of commitment

Anyone worried that the U.S. Federal Reserve tied its policy hands with its announcement last month that  it is likely to keep short-term interest rates exceptionally low through late 2014 should take heart in the market reaction to Friday’s jobs report, which blew expectations out of the water.

Bond and interest-rate futures plunged after the report, which showed employers added 243,000 jobs in December, far more than the 150,000 economists had expected. Unemployment dropped to 8.3 percent in another encouraging sign. Fed fund futures contracts began pricing in a good chance of a rate hike by the second quarter of 2014. Before the report, bets were on a first rate hike at some point in the third quarter.

Some officials and analysts have publicly worried about the chilling effects of a Fed that signaled low rates for so long, a move they say threatens confidence just as the economy is showing signs of improvement and leaves the impression that the late-2014 date is a commitment.