Sometimes stuff happens right up front in the yield curve while all the focus is on the random meanderings off in the distance. Last year at this time 3 month LIBOR - the unsecuritized uncollateralized rate at which banks don't borrow from each other - was 23bp. This rate was about 10 to 12 bp over the ZIRP induced FF rate. A month ago this posted set was 33bp and now (turn included in 1s and 3s) is 42bp. (1month was 16 and now 24). GC has been trading slightly over the open rate for more silliness tossed off as "technical".
The EDZ15 contract that expires in about a week is trading 9948+/9949. The contract has over a million in open interest about 100k skewed to the put side. The contract expires 2 days prior to the FOMC meeting. Jan is showing at 9942 and has lost an amazing 19 ticks since Oct. None other than GS' Hatzius is warning of 2 yr rates not adjusting enough to the pending Fed "normalization."
On this meta-narrative we remain amused if not quite disgusted. Throughout the past year, as long- enders have seen their Fed bets turn bad meeting after meeting, the front has done a Bataan Death March higher. Now sufficiently in front of the Fed, the Committee will adjust up behind Mr. Market. Normalization? This is a concept regurgitated on the public that plays to the embedded notion that policy rates were aggressively held down below their "natural" levels. We have shown, and continue to highlight here, that is/was never the case. The Fed is now pushing a follow-up narrative that hikes will be attenuated and inconsistent, a process that by definition refutes the normalization meme. ("Slightly less abnormal ?")
The "Slow Fed" movement is actually an admission that prior habits were dangerous and wrong. The Greenspan 1/4 point a meeting folly saw the funding rate (of a system actually based on wholesale funding) go from 3 to 5.25 with virtually no reduction in credit creation. That financial system no longer exists. We see policy calibrated still accommodative after the hike. Balance sheet management and Death Star firings, if and when they occur, will be far more important to our view in 2016 than the FF rate.