Fed fund futures price in a rate hike in 2021

Fed funds futures – financial contracts that represent the market opinion of where the daily official federal funds rate will be at the time of the contract expiry – are now fully priced for a hike in interest rates to 0.25% by January 2023. 

Further, the futures foresee a total of three rate hikes by the end of 2023. 

The odds of an early rate hike have improved significantly in recent days with growing inflation concerns and signs that the economy is making a strong comeback from the coronavirus-induced recession. 

The 10-year Treasury yield rose to 1.6% last week, taking the year-to-date gains to 50 basis points. Stock markets turned risk-averse on prospects of early Fed tightening, sending the dollar higher across the board.