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This may be my first rate cut since I joined the industry. I've only see rate hikes and I've been reading through literature from back in 2007 when the Fed last cut rates to get a general feel for how markets move but need to get a sense of how spots/forwards behave.

If the market prices the Fed cutting rates either from weak economic data (inflation, economic growth, etc..), which moves first? Spot or forwards. I know they're tied together but it seems like forwards reflect what the market expects and the spot would adjust accordingly. However, there are different forward dates so do they collectively all influence how the spot prices move?

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Are you talking about Fed Funds futures? That is the most liquid instrument relevant to your question. What happens is that the futures move according to what the market expects the Fed to do, then the spot moves according to what they actually do.

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  • $\begingroup$ I am referring to vanilla Treasury spot yields. I guess by a similar logic, the forwards move to reflecting expectations of the Fed and the spot yields moves/adjust itself based on this. $\endgroup$ May 2 '19 at 2:00
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as @dm63 noted, look at fed funds futures. also look at ois swap rates and sofr 3m futures. they should all embed market expectation of rate hikes/cuts. one way to extract market expectation is to use piecewise flat interpolation of 1d forward rates with nodes on fomc meeting dates and also adjust your forward for month end/quarter end/year end jumps.

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