Fed Hike aftermath Series: Hike probabilities over next 12 months

FOMC increased interest rates again in December for the third and projected three more hikes in 2018. However, debates among policymakers are growing over hikes as inflation remains low. Charles Evans joined Neel Kashkari in opposing another hike in December. The market is also not ready to price three rate hikes for next year. Let’s look at hike probabilities for the next 12 months.  Current FOMC rate is at 125-150 basis points. (Note, all calculations are based on data as of 2nd January)

• January 2018 meeting: Market is attaching 98.5 percent probability that rates will be at 1.25-1.50 percent, and 1.5 percent probability that rates will be at 1.50-1.75 percent.
   
• March 2018 meeting: Market is attaching 43 percent probability that rates will be at 1.25-1.50 percent, 56.2 percent probability that rates will be at 1.50-1.75 percent, and 0.9 percent probability that rates will be at 1.75-2.00 percent.
   
• May 2018 meeting: Market is attaching 40.3 percent probability that rates will be at 1.25-1.50 percent, 55.3 percent probability that rates will be at 1.50-1.75 percent, 4.3 percent probability that rates will be at 1.75-2.00 percent, and 0.1 percent probability that rates will be at 2.00-2.25 percent.  
   
• June 2018 meeting: Market is attaching 14.1 percent probability that rates will be at 1.25-1.50 percent, 45.6 percent probability that rates will be at 1.50-1.75 percent, 37.5 percent probability that rates will be at 1.75-2.00 percent, and 2.8 percent probability that rates will be at 2.00-2.25.
   
• August 2018 meeting: Market is attaching 12.8 percent probability that rates will be at 1.25-1.50 percent, 42.7 percent probability that rates will be at 1.50-1.75 percent, 38.2 percent probability that rates will be at 1.75-2.00 percent, 5.9 percent probability that rates will be at 2.00-2.25 percent, and 0.3 percent probability that rates will be at 2.25-2.50 percent.
   
• September 2018 meeting: Market is attaching 6.8 percent probability that rates will be at 1.25-1.50 percent, 28.7 percent probability that rates will be at 1.50-1.75 percent, 40.3 percent probability that rates will be at 1.75-2.00 percent, 21 percent probability that rates will be at 2.00-2.25 percent, 2.9 percent probability that rates will be at 2.25-2.50 percent, and 0.1 percent probability that rates will be at 2.50-2.75 percent.
   
• November 2018 meeting: Market is attaching 6.5 percent probability that rates will be at 1.25-1.50 percent, 27.6 percent probability that rates will be at 1.50-1.75 percent, 39.7 percent probability that rates will be at 1.75-2.00 percent, 22 percent probability that rates will be at 2.00-2.25 percent, 3.9 percent probability that rates will be at 2.25-2.50 percent, and 0.3 percent probability that rates will be at 2.50-2.75 percent.
   
• December 2018 meeting: Market is attaching 4.4 percent probability that rates will be at 1.25-1.50 percent, 20.7 percent probability that rates will be at 1.50-1.75 percent, 35.8 percent probability that rates will be at 1.75-2.00 percent, 27.8 percent probability that rates will be at 2.00-2.25 percent, 9.8 percent probability that rates will be at 2.25-2.50 percent, 1.6 percent probability that rates will be at 2.50-2.75 percent.
   

The probability is suggesting,

• Since our last review two weeks ago, the probability for rate hikes has marginally eased in the near months and tightened in the longer months, and, the market is still not pricing a third hike for December. Next hike is priced in March with 57.1 percent probability, instead of 60 percent two weeks ago.
• The market is pricing the second hike for 2018 in September with 64.5 percent probability compared to 59.2 percent probability, two weeks ago.
   
• The market is pricing a third hike in December with only 39.2 percent probability instead of 33.1 percent probability just two weeks ago.

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