What is the equilibrium Fed funds rate?
Kevin Ferry's Fed Funds Model
Based on Kevin Ferry’s model (the go-to guy for money market interpretation), the current Fed funds rate at ~10 bps (0.10%) is already neutral. The benchmark for which he measures this equilibrium is the spread between FF and 12-month LIBOR, which at 66 bps has not even budged since the rest of the Eurodollar curve for 3-month LIBOR futures exploded in May and June. If the market was responding to an increase in the demand for money, these spot LIBOR rates would be increasing with the futures curve. They are not. The Fed thinks that it can go to 4% when at 10 bps, it’s already at equilibrium? I don’t think so.