Traders Predict The Fed Funds Rate Future Using Options

The Federal Open Market Committee meets September 18, and traders are aren't quite sure what to expect with respect to the Fed Funds Rate.

Will the FFR stay unchanged? Will it FFR decrease? If it decreases, by how much? These are questions that are perplexing market participants.

Luckily, we can measure how the market is betting on the future by looking at the options trading in Fed Funds Futures.

As of September 5, 2007, an analysis of Fed Funds Futures option pricing leads to the following predictions:

• 5.250%: 12 percent chance
• 5.000%: 28 percent chance
• 4.750%: 42 percent chance
• 4.500%: 10 percent chance
• 4.250%: 8 percent chance

The market is overwhelmingly expecting a drop in the FFR -- it just doesn't know by how much.