Fischer's remarks fuelled that sense of anticipation, though
interest rate futures contracts indicate that market is pricing in about 50/50 odds of an increase in December.
To measure how investors' views about the future path of the federal funds rate have evolved since late 2008, we examine changes in the prices of
interest rate futures contracts. The Chicago Board of Trade's federal funds futures market allows investors to purchase a contract which pays them interest on their investment equal to the average federal funds rate during the settlement month.
Last month, India's central bank took action to reverse that, announcing it would introduce 10-year
interest rate futures contracts by the end of the year.
Before yesterday's decision traders were betting on at least a quarter point cut at the bank's next meeting in August, according to Bloomberg estimates based on
interest rate futures contracts. Santos said he expects a half-point reduction next month to be the bank's last though sees room for more stimulus if evidence of a stronger recovery from a contraction in the third quarter of 2011 doesn't emerge.
Similarly, it is believed that yields on short-term
interest rate futures contracts might rise on speculation that policy makers would lift their overnight interest rate by 0.75 percentage point.
Prices for US
interest rate futures contracts showed dealers scaling back bets on further rate cuts, implying no more than a 50-50 chance the Fed will lower rates again in December, down from a perceived 64 per cent on Tuesday night.
For more than a decade, trading volumes in these contracts remained miniscule in comparison with other
interest rate futures contracts, such as 3-month eurodollar and long-term Treasury securities.
Fed funds futures are
interest rate futures contracts that are based on the monthly average fed funds rate for each month traded.
Moreover, as suggested by implied yields on
interest rate futures contracts, market participants had come to expect that the Federal Reserve would ease the federal funds rate as much as 50 basis points by year-end and that the Bank of Japan might ease call rates again but by a smaller increment (roughly 25 basis points).
Prior to the introduction of swaps, the principal instruments for hedging interest rate risk were
interest rate futures contracts. Thrifts were never big users of futures.