The best way to obtain consensus is to read the federal funds futures contracts.
These contracts trade out 10 months - one contract for each month. The price
quoted is 100 minus 'effective fed funds', which represents the market's expectations
of the overnight fed funds rate. Using these contracts, one can place a probability
of when and how much the Federal Reserve's Federal Open Market Committee (FOMC)
will move rates.
There are three outcomes of an FOMC meeting: it can raise, lower or maintain
the target fed funds rate. However, the market is concerned with only two outcomes;
simply put, will the FOMC raise the fed funds rate or not? If the FOMC changes
the fed funds rate, is the amount just as likely to be 25 basis points (b.p.),
50 b.p., 75 b.p., or 100 b.p.?
Take the July fed funds contract as of May 10, 2004, as an example: the price
is 98.77, resulting in an implied rate of 1.23 percent. The contract is trading
at 23 b.p. higher than the current fed funds target rate of 1.00 percent. If
we take the 23 b.p. and divide it by the Fed's anticipated 25 b.p. move (contracts
trade under the assumption that a minimum move is 25 b.p.), we conclude that,
by July, there is a 92 percent probability that the Fed will increase rates
by 25 b.p. and an 8 percent probability that rates will remain unchanged.
Now, examine the August contract; and follow closely! The August contract is
trading at 98.55, for an implied rate of 1.45 percent. The difference between
1.45 percent and 1.00 percent (the current rate) is 45 b.p. Accordingly, the
market foretells a 100 percent probability that the Fed will move rates up by
25 b.p., and an 80 percent probability [(45 b.p. -25 b.p.)/25 b.p.] that the
Fed will move rates up by 50 b.p. by August.
The answer to your question is that the market sides with economists and that
it believes there is a 100 percent chance the Fed will move rates up to 1.25
percent by August. The last available contract tells us that the market has
priced in, with 100 percent probability, that the Fed will increase rates to
2 percent by December 2004 (the contracts are currently trading at an implied
rate of 2.06 percent.)
There's just one problem. Lately, the contracts have been wrong as often as
they have been right. With market sentiment changing on a dime, it is common
to see the contracts swinging wildly to extremes; leaving the economists and
us for wont of a crystal ball.