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FOMC increased interest rates again in December for the third time 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. Even 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 15th 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 26.3 percent probability that rates will be at 1.25-1.50 percent, 72.6 percent probability that rates will be at 1.50-1.75 percent, and 1.1 percent probability that rates will be at 1.75-2.00 percent.
- May 2018 meeting: Market is attaching 25.8 percent probability that rates will be at 1.25-1.50 percent, 71.6 percent probability that rates will be at 1.50-1.75 percent, and 2.6 percent probability that rates will be at 1.75-2.00 percent.
- June 2018 meeting: Market is attaching 7 percent probability that rates will be at 1.25-1.50 percent, 36.7 percent probability that rates will be at 1.50-1.75 percent, 49.9 percent probability that rates will be at 1.75-2.00 percent, and 6.5 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 3.2 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, 42.7 percent probability that rates will be at 1.75-2.00 percent, 29.8 percent probability that rates will be at 2.00-2.25 percent, 3.5 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 3.1 percent probability that rates will be at 1.25-1.50 percent, 19.8 percent probability that rates will be at 1.50-1.75 percent, 41.6 percent probability that rates will be at 1.75-2.00 percent, 30.5 percent probability that rates will be at 2.00-2.25 percent, 4.8 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 2.1 percent probability that rates will be at 1.25-1.50 percent, 14.3 percent probability that rates will be at 1.50-1.75 percent, 34.4 percent probability that rates will be at 1.75-2.00 percent, 34.1 percent probability that rates will be at 2.00-2.25 percent, 13.2 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 in December. Next hike is priced in March with 73.7 percent probability, instead of 64.9 percent a week ago.
- The market brought forwarded the second hike for 2018 in June and pricing it with 52.7 percent probability compared to 46.3 percent probability, a week ago.
- The market is pricing the third hike in December with 49.2 percent probability instead of 44 percent probability just a week ago.
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