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 37.4 percent probability that rates will be at 1.25-1.50 percent, 61.6 percent probability that rates will be at 1.50-1.75 percent, and 1 percent probability that rates will be at 1.75-2.00 percent.
   
• May 2018 meeting: Market is attaching 35.1 percent probability that rates will be at 1.25-1.50 percent, 60.1 percent probability that rates will be at 1.50-1.75 percent, 4.7 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 12.3 percent probability that rates will be at 1.25-1.50 percent, 43.9 percent probability that rates will be at 1.50-1.75 percent, 40.7 percent probability that rates will be at 1.75-2.00 percent, and 3.1 percent probability that rates will be at 2.00-2.25.
   
• August 2018 meeting: Market is attaching 11.1 percent probability that rates will be at 1.25-1.50 percent, 40.7 percent probability that rates will be at 1.50-1.75 percent, 41 percent probability that rates will be at 1.75-2.00 percent, 6.9 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 5.2 percent probability that rates will be at 1.25-1.50 percent, 25 percent probability that rates will be at 1.50-1.75 percent, 40.9 percent probability that rates will be at 1.75-2.00 percent, 24.9 percent probability that rates will be at 2.00-2.25 percent, 3.8 percent probability that rates will be at 2.25-2.50 percent, and 0.2 percent probability that rates will be at 2.50-2.75 percent.
   
• November 2018 meeting: Market is attaching 4.9 percent probability that rates will be at 1.25-1.50 percent, 24 percent probability that rates will be at 1.50-1.75 percent, 40 percent probability that rates will be at 1.75-2.00 percent, 25.7 percent probability that rates will be at 2.00-2.25 percent, 4.9 percent probability that rates will be at 2.25-2.50 percent, and 0.4 percent probability that rates will be at 2.50-2.75 percent.
   
• December 2018 meeting: Market is attaching 3.3 percent probability that rates will be at 1.25-1.50 percent, 17.8 percent probability that rates will be at 1.50-1.75 percent, 34.8 percent probability that rates will be at 1.75-2.00 percent, 30.4 percent probability that rates will be at 2.00-2.25 percent, 11.7 percent probability that rates will be at 2.25-2.50 percent, 1.9 percent probability that rates will be at 2.50-2.75 percent.
   

The probability is suggesting,

• Since our last review a week ago, the probability for rate hikes has tightened further for both near months and longer months, however, the market is still not pricing the third hike for December. Next hike is priced in March with 64.9 percent probability, instead of 57.1 percent a week ago.
   
• The market is pricing the second hike for 2018 in September with 69.8 percent probability compared to 64.5 percent probability, a week ago.
   
• The market is pricing the third hike in December with only 44 percent probability instead of 39.2 percent probability just a week ago.

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