After a Wednesday report showed consumer prices rose in January by more than projected, traders used eurodollar futures to express their view that central bankers have a clearer path to tighten. The expected number of increases from now until the end of next year is up to four, from 3.6 before the inflation report.

  • $\begingroup$ As @lliane has pointed out, this is not a good way to calculate expected rate hikes, since Eurodollar futures 1) trade at a time-varying spread to Fed funds, and 2) cover a 3-month window which can easily span two FOMC meetings. Instead, you should consult Fed Funds futures. $\endgroup$ – Helin Feb 15 '18 at 10:25

Yield of Dec19 Future - Current 3Months Libor / 25 bps (1 rate hike)

Libor 3M = 1.84 % Price of Dec 19 Future (Ticker EDZ9) = 97.18 = 2.82 %

Number of hikes = (2.82 - 1.84)/0.25 = 4

Please note these are very simplifying assumptions, as the 3 months Libor is just a proxy on the Fed Funds Target rate.


In my experience Chinese whispers between IR traders and bank/institution strategy/researchers and then journalists is rife. Hikes/cuts are predicted by traders based on FedFund futures or meeting period FFOIS rates. The same goes for GBP or EUR where the OIS rates dictate the probability of hikes/cuts.

Note that your quote didn't directly say the expected number of increases was calculated from the eurodollar futures. It said they were used to express a view. Which is sensible because they are a very liquid product with minimal execution cost. But they are a proxy to bank rate as Lilane states.

As an aside if you assume that the LIBOR/OIS basis is stable over a short period of time and the Eurodollar strip moved 10bps, you can assume the OIS strip moves 10bps also which accounts for 10/25= 40% of a 25bp hike.


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