You know I used to be a “media-junkie” i.e. believe every media article (Nigerian and Global Media) word for word. Until, I got to University and a lecturer told me at the end of a 12 week course-“Don’t believe everything they tell you-always verify the news”. What this woman told me has guided me ever since!
With that, I would like you bring you to the latest “news” going around- The USA Federal Reserve is about to raise interest rates in 2015. For those of us not in the financial industry the rates set by the USA Federal Reserve (i.e. USA Central Bank a.k.a USA FED) affect you, I don’t want to get into details of it but just know that an increase in interest rates could benefit savers but also hurt investment flows and borrowers especially in emerging market countries like Nigeria.
These “news” of rate hike is not new- it’s been going on for a while. In 2014, 67 out of 67 economists (from top Universities/ work with top all street firms) polled by Bloomberg (see here) predicted the USA FED would raise its benchmark interest rate in 2014…..and………there was no rate hike in 2014! The Economists were flat out wrong! Many academics and economists have also been predicting USA interest rate hikes this year- so far, they have been- wrong.
Despite this, Financial media (see here), Economists and apparently even our CBN Governor are anticipating interest rate hikes this year (see here). People (inside and outside the financial industry) are really panicking, over possible interest rate hikes in 2015. So what do we do?
Let’s see the fact-to help us, we look at the Federal Funds Futures market.
The Fed Funds Futures Market- is a market where traders (People who actually put money to work in financial markets) make trades in anticipation of USA FED interest rate action. This market has been right in predicting low probability of USA FED hikes over the last few years. Right now, the Fed Fund futures market is pricing a 24% probability of rate hike in September 2015, a 31% probability of a rate hike in October 2015, and a 49% possibility of a rate hike in December 2015
IMPLIED PROBABILITY OF USA FED RATE HIKE IN SEPTEMBER 2015
So Here we are again- do we believe the “news” given to us by the media or probability data given to us by the Fed Funds Futures market? The decision is up to you.
I know my own decision!
Disclosure: No one 100% knows whether there would be a USA FED rate hike this year. The best we can do is work with probabilities.
I do have a position on the Bund that would be more profitable if the FED does not raise rates.