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Despite hawkish rhetoric from FOMC policy makers, the hike odds are declining across the meeting as the economic numbers including inflation continue to disappoint to the downside, coupled with political gridlock in Washington and ongoing geopolitical crisis. In addition to that, some policymakers have expressed doubts over the third hike for the year. 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 11th August)
- September 20th meeting: Market is attaching 95.9 percent probability that rates will be at 1.00-1.25 percent, and 4.1 percent probability that rates will be cut to 0.75-1.00 percent.
- November 1st meeting: Market is attaching 90.4 percent probability that rates will be at 1.00-1.25 percent, 5.8 percent probability that rates will be at 1.25-1.50 percent, and 3.8 percent probability that rates will be cut to 0.75-1.00 percent.
- December 13th meeting: Market is attaching 54.6 percent probability that rates will be at 1.00-1.25 percent, 40.7 percent probability that rates will be at 1.25-1.50 percent, 2.4 percent probability that rates will be at 1.50-1.75 percent, and 2.3 percent probability that rates will be cut to 0.75-1.00 percent.
- January 2018 meeting: Market is attaching 52.1 percent probability that rates will be at 1.00-1.25 percent, 43 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, and 0.3 percent probability that rates will be at 1.75-2.00 percent.
- March 2018 meeting: Market is attaching 46.3 percent probability that rates will be at 1.00-1.25 percent, 44.1 percent probability that rates will be at 1.25-1.50 percent, 9 percent probability that rates will be at 1.50-1.75 percent, and 0.7 percent probability that rates will be at 1.75-2.00 percent.
- May 2018 meeting: Market is attaching 44.8 percent probability that rates will be at 1.00-1.25 percent, 44.1 percent probability that rates will be at 1.25-1.50 percent, 10.1 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.
- June 2018 meeting: Market is attaching 35.5 percent probability that rates will be at 1.00-1.25 percent, 44.2 percent probability that rates will be at 1.25-1.50 percent, 17.2 percent probability that rates will be at 1.50-1.75 percent, 2.9 percent probability that rates will be at 1.75-2.00 percent, and 0.2 percent probability that rates will be at 2.00-2.25 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 3-5 percentage points across the board, the market is currently attaching probabilities to rate cut for 2017.
- The financial market is no longer pricing the third hike in December, instead, the next hike is priced in March 2018 with 55.2 percent probability. Hike probability has declined by almost 6 percent since the last review.
- We are currently expecting the third rate hike in December and the beginning of balance sheet trimming in September.
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