Fed Funds Futures Pricing in “No Landing”

Apollo Chief Economist

Fed funds futures show that the market is currently pricing that the Fed funds rate over the next five years will bottom at 4% and then slowly start to rise again, see chart below.

In other words, the market is pricing that monetary policy will remain restrictive and above r-star (2.5%) for the next five years. Put differently, the market is currently pricing a “no landing” scenario where monetary policy will have to put downward pressure on GDP growth and inflation for the next five years. In short, the market is extremely bullish on the economic outlook over the next five years.

A different way to look at current Fed pricing is to compare Fed funds futures to the longer-run dot in the Fed’s dot plot, which shows that the FOMC expects the Fed funds rate in the longer run to be 2.5%.

The bottom line is that the FOMC and Fed estimates of r-star are saying that the Fed funds rate will move down to 2.5%. But the market disagrees and says that rates will stay around 4% for the next five years, see again the chart below.

Fed funds futures pricing a “no landing” scenario
Source: Bloomberg, Apollo Chief Economist

Download high-res chart(s)

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