Short Rates Are Going No Where.

Selling pressure in Federal Funds Futures reflects growing sentiment that the FOMC will tighten at the Fed Meeting on Nov. 3-4. November FFF Contract recently prices in about 40% chance for 0.5% funds rate target, from current 0% to 0.25% range. That's up from about 28% chance at yesterday settlement.

First of all:

1- The Fed is not raising Short Rates period. The credit system is still in a very precarious situation. I know a non existent short rate is no good for anyone, low rates got us in this mess, but considering there are no other alternatives other then 100% Nationalization and starting all over again, they cant afford a spiraling LIBOR MKT and tighter credit in the system. The credit/shadow banking system needs lending to flow, or the system dies. Period.

2-Fed Fund Futures Markets and corresponding derivatives are a useless product only there to make the Market Makers/Dealers wealthy. These are one of the complex contracts that need to be eliminated.

MOST IMPORTANTLY-

3-Most HELOC/Auto Loan are priced off of LIBOR, which takes its queue from US Short Rates, a corresponding rise in short rates, will make LIBOR rise, thus making interest payments on outstanding HELOC loans more difficult to service. I understand that LIBOR rate calculations do take into account other factors, but one of the most are the direction of US Short Rates. If there is any indication (Lehman/AIG/Bear) that the US System is in trouble, you will have a sudden dramatic rise in LIBOR. The FOMC is not going to chance this occurrence.

4-Political Risk - Obama and the boys are head first and own this crisis. They will not allow Bernanke to raise short rates. Its not going to happen until the credit system which is showing some signs of a heartbeat recovers.

Rates cant stay at near 0 levels for ever, but at least they will during the rest of this year...and partly next year.