This Fed Funds Rate futures chart is pretty astounding and illustrates just how powerful the Fed's words can be.

To help you read the chart, follow these simple guidelines:

• The farther you go to the right, the closer you get to "today"
• The farther you go to the top, the higher the probability of the result
• The blue line represents "5.250% Fed Funds Rate"
• The green line represents "5.500% Fed Funds Rate"
• The purple line represent "5.000% Fed Funds Rate"
• Vertical lines represent milestone events (i.e. FOMC statement)

The chart shows us that markets believe that -- in January 2007 -- there is a 75% chance that the FFR will still be 5.250%.  Last week, that chance was 66%.

Mortgage rates have pulled back in the wake of the Fed's announcement and the chart can also help us understand why.

Look at the green line representing 5.550%.  It actually represents the market's feeling about inflation.  If markets believe that inflation is running too high, then the green line becomes reality. 

Currently, the chance of that happening is just 12% and mortgage rates are lower is response to that expectation.

It shouldn't surprise you that today's mortgage rates are on level with the October 10's rates -- the most recent day that the green line probability was 12%.

What a difference the phrase "moderate growth" makes.

Source
Fed Fund Probabilities:: Current
The Federal Reserve Bank of Cleveland, October 27, 2006
http://www.clevelandfed.org/research/policy/fedfunds/Index.cfm

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.