Fed funds futures believe the doves but the consequences are

Following dovish comments on Tuesday from the Fed’s Vice Chairman Kohn and further confirmed in yesterday’s FOMC minutes from the Sept meeting, the Fed’s easy for longer policy is reflected in today’s fed funds futures where the odds for a 25 bps hike by the April meeting are now at the lowest level in this cycle at 78%. Odds remain for a 100% chance of a hike of 25 bps by the June meeting but the chances of a total of a 50 bps by then are moving lower. Combine this with a fresh 14 month low in the US$ and solid earnings giving hopes for overall economic improvement and the CRB index is breaking out to the highest level since Nov ’08 and the implied inflation rate in the 10 yr TIPS is rising to just shy of the highest level since June while the 5 yr TIPS is pricing in the highest inflation rate since June. Gasoline futures in particular for those of us who drive are just below one year highs.

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