As I anticipated in my previous post, the brains and brawn behind extracting estimates of prospective federal funds rates from options on funds futures contracts -- namely John Carlson and Erkin Sahinoz -- were hard at work today. As a result of their efforts, the verdict is now in on where the market stood at Friday close with respect to the next two FOMC meetings. As you might have guessed, the expectation of a pause after a 25 basis point increase next week has taken the lead:
Here's a version with the timing of the week's news indicated:
As a special bonus for your patience, here are the results obtained from the January 2006 contract, which carries us through the December FOMC meeting:
Pause, pause now has the largest probability attached to it, and you can put that squarely in the lap of Katrina.
For you aficionados out there, the January estimates were obtained with some new and improved features in the estimation methodology. Specifically, the estimated probabilities are constrained to sum to one, and the mean is constrained to be consistent with the value of the funds rate implied by the actual futures contracts. I expect that future estimates will be calculated in this way.
Here's the data for the pictures above, for you to enjoy at your leisure:
UPDATE: There are, of course, a lot of opinions about where the FOMC is heading out there in bloggerville (and beyond). New Economist, Economist''s View, and Everyone's Illusion provide a sampling.