What Does Thursday's Dramatic Shift in the Fed Fund Futures Forward Curve Tell Us?

• Deferred Fed fund futures contracts dropped Thursday, creating a dramatic change in the market's forward curve.
• The forward curve is now showing the market does not believe another rate cut will be made through at least May 2027.
• The reason is simple:  Fear of inflation long-term, or F.O.I.L. 

Late in Thursday’s session, I noticed something unusual with the Fed fund futures (ZQK26) forward curve. In Wednesday’s Morning Commentary I wrote

• A look at the Fed fund futures forward curve early Wednesday morning shows futures contracts are pricing in a Fed fund range between 3.5% and 3.75% through the September 2026 issue. There we see the price sitting on 96.5, meaning the outcome of that meeting is a 50-50 chance for the next rate cut. However, as markets get rolling Wednesday, I’m expecting the September contract to dip back below 96.5, keeping the next cut projected for October.

Compare that to the curve from Thursday afternoon (blue line, the green line being the curve from Friday, March 13, similar to this past Wednesday).

• The deferred futures contracts (ZQJ26) collapsed, dropping below the high end of the ongoing Fed fund range between 96.5 and 96.25 (3.5% and 3.75% Fed fund rate).
• A look at the cmdtyView quote screen shows the futures market out through May 2027 trading below the 96.5 level indicating the market is not pricing in any rate hikes over the next year-plus.

With the US president’s puppet chairman expected to take the reins after Fed Chairman Powell’s term ends this coming May, the curve initially showed a possible rate cut following the June meeting, which was then pushed back to July, the September, and October, and now gone for the foreseeable future. What changed over the past couple months? The US president started a War in Iran, raising the fear of inflation long-term, or F.O.I.L.

We don’t usually see this dramatic of a shift in the forward curve so quickly, particularly in Treasuries or Fed fund futures. These market sectors are generally slower moving, unless something chaotic – or maybe catastrophic – happens. However, this fits with the other ripple effects of the US president’s self-declared War in Iran, something I’ll be talking about in more detail over the weekend.