My post yesterday parsing the FOMC Statement noted that the Fed was ready to unwind and today Fed fund futures have caught on (see chart below). The Fed believes that that there is no need to rush the process because there is plenty of slack in the economy to provide inflation cover against rising energy and commodity prices. The S&P Goldman Sachs Commodity Index has risen from a low of 305.585 on February 19 to the current level of 458.3169 -- a 50% increase but still well below the high of 893.859 hit almost one year ago to the day.
The rise in commodity prices reflects recovery from depression fears not inflation and so too is the steepening Fed funds futures curve. Against May 29 and March 31 levels, there hasn't been much price change in contracts expiring between now and early 2010. Thereafter the expectation for higher rates grows. Compared with May 29 expectations, the market has raised its funds forecast for Spring 2011 by 50bps to 2.25%. Not inflation, a return of optimism.