How Does Reflation Look From The Point of View of the One Market That Gets It

Eurodollar futures are derivative, cash-settled contracts linked to 3-month LIBOR (forget about SOFR and the official hatred of this offshore dollar rate regime). Though that rate acts independently especially at the worst times (thus, the hate), it is heavily influenced by the front-end monetary alternatives set by the Federal Reserve’s monetary policy (IOER, RRP). Because of this, LIBOR kind of seems like it should reflect whatever the Federal Reserve wants; and domestic central bankers love to make it sound like this is how it works (therefore, because it doesn’t work this way, they really, really want to get rid of it).

Institutions betting and hedging in this market aren’t positioning based on what Jay Powell and models at the Fed (and other money markets) thing the future might look like but instead what Jay Powell and the Fed will be forced to look at when that future gets closer. Central bankers are always, always behind.

In other words, the eurodollar futures market has, time and again, figured out what Federal Reserve monetary policy will look like long before Federal Reserve policymakers do. By the time officials understand what’s really going on, they’re following the market rather than the other way around. Read more…..


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