Fed Hike aftermath Series: Market brought-forward rate hike probability to December 2017 from September 2018

Last week, several key policymakers including Lael Brainard, Neel Kashkari, Robert Kaplan have warned against future rate hikes citing of lower inflation. Kashkari even went further to add that Fed rate hikes so far may have hurt the economy. However, the latest inflation report released this week shows that inflation rose faster than expected in August. In light of that, let’s take a look at the market pricing of hikes.  The current interest rate is at 1.00-1.25 percent.  (Note, all calculations are based on data as of 8th September)

• September 20th meeting: Market is attaching 98.6 percent probability that rates will be at 1.00-1.25 percent, and 1.4 percent probability that rates will be cut to 0.75-1.00 percent.
   
• November 1st meeting:  Market is attaching 94.7 percent probability that rates will be at 1.00-1.25 percent, 3.9 percent probability that rates will be at 1.25-1.50 percent, and 1.3 percent probability that rates will be cut to 0.75-1.00 percent.
   
• December 13th meeting: Market is attaching 46.5 percent probability that rates will be at 1.00-1.25 percent, 50.9 percent probability that rates will be at 1.25-1.50 percent, 2 percent probability that rates will be at 1.50-1.75 percent, and 0.6 percent probability that rates will be cut to 0.75-1.00 percent.
   
• January 2018 meeting: Market is attaching 44.6 percent probability that rates will be at 1.00-1.25 percent, 50.7 percent probability that rates will be at 1.25-1.50 percent, 4.1 percent probability that rates will be at 1.50-1.75 percent, and 0.7 percent probability that rates will be cut to 0.75-1.00 percent.
   
• March 2018 meeting: Market is attaching 35.9 percent probability that rates will be at 1.00-1.25 percent, 49.5 percent probability that rates will be at 1.25-1.50 percent, 13.3 percent probability that rates will be at 1.50-1.75 percent, 0.9 percent probability that rates will be at 1.75-2.00 percent and 0.5 percent probability that rates will be cut to 0.75-1.00 percent.
   
• May 2018 meeting: Market is attaching 36.4 percent probability that rates will be at 1.00-1.25 percent, 49.4 percent probability that rates will be at 1.25-1.50 percent, 12.7 percent probability that rates will be at 1.50-1.75 percent, 1 percent probability that rates will be at 1.75-2.00 percent and 0.5 percent probability that rates will be cut to 0.75-1.00 percent.
   
• June 2018 meeting: Market is attaching 27.4 percent probability that rates will be at 1.00-1.25 percent, 46.1 percent probability that rates will be at 1.25-1.50 percent, 21.9 percent probability that rates will be at 1.50-1.75 percent, 3.9 percent probability that rates will be at 1.75-2.00 percent, 0.3 percent probability that rates will be at 2.00-2.25 percent, and 0.4 percent probability that rates will be cut to 0.75-1.00 percent.
   

The probability is suggesting,

• There has been a lot of changes since our last review more than a week ago. Hike odds have not only increased by 20-25 percentage points across the board, the market has brought forward hike expectation from beyond June next year to December this year.
• We are currently expecting the beginning of balance sheet trimming in September. 

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