The bond market nearly doubled the chances of a 3.75% year-end Federal funds rate after Federal Reserve Chairman Alan Greenspan's congressional testimony last week. The move was quite an about-face for a market that had been nearing consensus on a 3.5% Fed funds rate by the end of the year, according to John Herrmann, director of economic commentary at Cantor Viewpoint.
After Greenspan's testimony, the probability of three more rate hikes in 2005 rose to 85% from 48%, expressed through the spread of the June and December Eurodollar futures contracts. Herrmann pointed to Greenspan's comments that monetary policy is still accommodative, the risk of inflation remains and rapidly rising home prices could pose risks to the economy all as indicators he remains determined to take liquidity out of the system.
