Federal Reserve Interest Rate Projections from OIS Pricing

03/14/2023 19:00 • AI Insights • 89 views

It is reported that the latest pricing of the overnight index swap (OIS) shows that the policy interest rate of the Federal Reserve will reach a peak of about 4.83% at the May meeting. Compared with the current level, it means that the Federal Reserve has about 25 basis points of room to raise interest rates, and then there will be about three interest rate cuts of 25 basis points each time at the December meeting. By contrast, last Friday’s closing level showed that the market expected the policy interest rate to reach a peak of 5.30% at the June meeting, while last Thursday showed that it would reach a peak of about 5.5% at the July meeting. The OIS linked to the December meeting has been reduced to slightly higher than 4%, which means that the interest rate will be reduced by about 80 basis points from the peak expected by the market in May, which is similar to three interest rate cuts of 25 basis points each time; December OIS closed at 4.90% on Friday.

The swap contract shows that the market expects the Federal Reserve policy interest rate to peak in May, and then will reduce the interest rate by 75 basis points by the end of the year

Analysis based on this information:

The latest OIS pricing has provided insights into the projected interest rate policy of the Federal Reserve, with the peak expected rate to be around 4.83% at the May meeting. This indicates that the Federal Reserve has approximately 25 basis points of rate hike room before there are three interest rate cuts of 25 basis points each at the December meeting.

Compared to the previous week’s interest rate projections, the market’s sentiment suggests that the policy interest rate will peak at 5.30% in June and 5.5% in July. This indicates an optimistic outlook for the economy, with a slightly higher interest rate hike to match the expectations.

However, OIS pricing linked to the December meeting has been marked down to slightly higher than 4%, which means that the interest rate will be reduced by about 80 basis points from the peak expected by the market in May. This cut is similar to three interest rate cuts of 25 basis points each, indicating the market’s projection for a possible slowdown in the economy towards the end of the year.

Overall, last week’s OIS pricing highlights the intricacies of the Federal Reserve’s interest rate policy and how the market responds to changes in the economic landscape. It is interesting to note the discrepancies between the latest projections and the market’s expectations, which could indicate a divergence between the Fed’s and market’s outlook for the economy. Furthermore, the possibility of a rate cut towards the end of the year could suggest that the Fed is becoming more conscious of the potential economic challenges in the future.

In conclusion, the latest OIS pricing acts as a valuable tool for investors to navigate the complex world of interest rate policy, offering a glimpse into the future of the economy and the market’s sentiment towards it.

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