How to know how many rate hikes are priced in?

Trading Discussion News and Economy
1

Hello fellow traders,

I was wondering if any of you guys would know of a method or place (site) where you can find data that tells you how many rate hikes are priced in?

I am aware of the CME FedWatch tool for the FED rate. But for the other central banks I’m pretty much clueless.

I know we can use the yield of bonds for a specific currency to see what the markets feel regarding inflation / interest rates / overall risk, but this does not show you a specific rate at which the market thinks the rates will be in the coming months/year.

I found that OIS (Overnight Index Swap) rates could provide what I’m looking for, but I can’t find a place where to find these rates on a day to day basis. I’m willing to pay for this data if required. Currently I’ve asked the Bloomberg customer service if this data is provided with an “All Acces” subscription (no respone yet), but I personally think this won’t be the case and I’m not in a state where I will buy a Bloomberg Terminal haha.

Like to hear if anyone has a method for this.

2 Likes
2

The CME FedWatch Tool is very useful.

You can also look at the Fed Funds futures. This will give you an indication of anticipated federal funds rate changes.

The price of a futures contract shows what the market thinks the FOMC will do with the fed funds rate in the future.

To determine what the market expects the Fed to do at its next gathering, find the contract for the month following the FOMC meeting.

Next, calculate the fed funds rate that is implied by the price of the futures contract by subtracting the futures price from 100.

For example, if you see 94.8 this means the markets expect the fed fund rate to be at 5.20% (100 - 94.8).

As new information comes out, market participants may change their minds about what the FOMC will do at the next meeting and change the price at which they are willing to buy or sell a fed funds futures contract.

You can also pay attention to the yields of shorter-duration government bonds as they are sensitive to interest rate changes.

2 Likes
3

Thanks for the reply! I will look into this further.

4

Here’s a useful example of the FedWatch tool beow.

Notice how the probabilities changed today after JPow spoke versus yesterday. Huge shift.

image
image990×833 73.8 KB

1 Like
5

Thanks for the example! In the coming period I’ll look for ways to see what the priced in rates are for other currencies. If they just had a tool like this one it would be great, but the information of the US is just on another level compared to other economies.

The link you send about the Fed Funds futures was really helpfull as to what I can look for regarding the other currencies. I have already found similar examples for the AUD, EUR and GBP. Having a harder time finding a one month forward rate for the CAD and NZD tho… Haven’t looked into CHF and JPY yet.

If I find something usefull I’ll post it underneath this thread for other traders. I haven’t found a threat for this yet on babyips.

6

In my opinion in order to determine how many rate hikes are priced in, you can look at the market’s expectations for interest rates, which are reflected in various indicators such as bond yields, futures contracts, and options prices.

1 Like
7

Thanks for your answer. If you have the time: Which futures contracts and options prices do you look at?

I am familiar with using futures contracts (but don’t know which one for each currency). Options prices is new to me.

8

To find OIS rates and gauge future interest rate expectations:

  1. Bloomberg Terminal: The go-to for comprehensive data. If it’s pricey, check if local universities offer access.
  2. Reuters Eikon: Comparable to Bloomberg and might be more affordable for individuals.
  3. Central Bank Websites: Some provide relevant financial market data.
  4. Brokers and Banks: Check if they offer insights or tools related to interest rate expectations.
  5. Quandl or Datastream: They might sell datasets including OIS rates.
1 Like
9

Well, the FED watch tool could be found in many places, and the 30-day federal funds future contracts could also be found on many charting related financial data websites.

However, don’t rely on them 100% They are not showing you the absolute reality of the future. They only show what the markets are pricing. They are showing you the consensus estimates of future expectations. Remember, they tend to change. There is no way to knowing that for 100%. Luckily, you don’t have to. you just need to know what the market knows and thinks about it.