Why Futures Are Important in Any Interest Rate Environment

 

At its April 2015 meeting, the Federal Open Market Committee (FOMC) of the Federal Reserve again voiced its commitment to keeping the benchmark federal funds interest rate near zero. The predictions that the Fed would raise rates as early as June now appear to fall well short of any actual rate change. As the U.S. economy inches back to full employment and 2 percent inflation — the Fed’s dual mandates — it appears the rate increase will (again) come later than expected.

But for something that has barely moved in several years, the fed funds rate is intensely watched. Each FOMC meeting is met with new predictions, new hope or new disappointment about what the Fed says and when the FOMC might finally decide to inch-up the rate. One sure-fire measure of the interest in the topic comes from looking at interest rate futures. Even in this environment of little movement, interest rate futures remain the most traded asset class on CME Group’s markets in terms of volume. There’s even a Fed Watch tool that gauges the view of market participants about when they expect rates to rise.

Why all the interest in interest rates?  For one thing, they affect everything. From home mortgages to credit cards, interest rates are embedded in your life in some way. That’s especially true for banks and other financial institutions whose ability to lend depends on where rates stand. Futures Fundamentals, CME Group’s education site, has broken down this process in a new video, underscoring how and why banks might trade interest rate futures:

Maybe it will be another year before U.S. rates move upward, but it will come sooner or later. As the video says, rate swings are inevitable.

Check out the full Futures Fundamentals site for more videos and graphics on futures markets.

Evan Peterson is director of corporate marketing at CME Group and managing editor of OpenMarkets.

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