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Fed Hike aftermath Series: Market pushed back hike expectations to June 2018

Despite hawkish rhetoric from several including Fed chair Janet Yellen, the hike odds are declining across meetings as the economic numbers including inflation continue to disappoint to the downside, coupled with political gridlock in Washington and ongoing geo-political crisis. In addition to that, some policymakers have expressed doubts over the third hike for the year due to low inflation levels. However, still a majority of the policymakers are still hawkish on the hike outlook. 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 30th August)

  • September 20th meeting: Market is attaching 97.3 percent probability that rates will be at 1.00-1.25 percent, and 2.7 percent probability that rates will be cut to 0.75-1.00 percent.
  • November 1st meeting: Market is attaching 95.4 percent probability that rates will be at 1.00-1.25 percent, 1.9 percent probability that rates will be at 1.25-1.50 percent, and 2.7 percent probability that rates will be cut to 0.75-1.00 percent.
  • December 13th meeting: Market is attaching 66.6 percent probability that rates will be at 1.00-1.25 percent, 30.9 percent probability that rates will be at 1.25-1.50 percent, 0.6 percent probability that rates will be at 1.50-1.75 percent, and 1.8 percent probability that rates will be cut to 0.75-1.00 percent.
  • January 2018 meeting: Market is attaching 65.3 percent probability that rates will be at 1.00-1.25 percent, 31.6 percent probability that rates will be at 1.25-1.50 percent, 1.2 percent probability that rates will be at 1.50-1.75 percent, and 1.8 percent probability that rates will be cut to 0.75-1.00 percent.
  • March 2018 meeting: Market is attaching 58.1 percent probability that rates will be at 1.00-1.25 percent, 35.4 percent probability that rates will be at 1.25-1.50 percent, 4.7 percent probability that rates will be at 1.50-1.75 percent, 0.1 percent probability that rates will be at 1.75-2.00 percent and 1.6 percent probability that rates will be cut to 0.75-1.00 percent.
  • May 2018 meeting: Market is attaching 58.1 percent probability that rates will be at 1.00-1.25 percent, 35.4 percent probability that rates will be at 1.25-1.50 percent, 4.7 percent probability that rates will be at 1.50-1.75 percent, 0.1 percent probability that rates will be at 1.75-2.00 percent, and 1.6 percent probability that rates will be cut to 0.75-1.00 percent.
  • June 2018 meeting: Market is attaching 46.8 percent probability that rates will be at 1.00-1.25 percent, 40 percent probability that rates will be at 1.25-1.50 percent, 10.8 percent probability that rates will be at 1.50-1.75 percent, 1.1 percent probability that rates will be at 1.75-2.00 percent, and 1.3 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 diminished by 8-10 percentage points across the board, the market has pushed back rate hike expectation from March 2018 to June 2018.
  • The financial market is still not pricing a third hike in December, instead the next hike is priced in June 2018 with 51.9 percent probability.
  • We are currently expecting the third rate hike in December and the beginning of balance sheet trimming in September.

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