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Despite hawkish rhetoric from FOMC policy makers, the hike odds are declining fast across the meeting as the economic numbers continue to disappoint to the downside, coupled with political gridlock in Washington. 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 2nd August)
- 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 at 1.25-1.50 percent.
- November 1st meeting: Market is attaching 92.7 percent probability that rates will be at 1.00-1.25 percent, 7.2 percent probability that rates will be at 1.25-1.50 percent, and 0.1 percent probability that rates will be at 1.50-1.75 percent.
- December 13th meeting: Market is attaching 54.4 percent probability that rates will be at 1.00-1.25 percent, 42.5 percent probability that rates will be at 1.25-1.50 percent, and 3 percent probability that rates will be at 1.50-1.75 percent.
- January 2018 meeting: Market is attaching 53.3 percent probability that rates will be at 1.00-1.25 percent, 42.8 percent probability that rates will be at 1.25-1.50 percent, 3.8 percent probability that rates will be at 1.50-1.75 percent, and 0.1 percent probability that rates will be at 1.75-2.00 percent.
- March 2018 meeting: Market is attaching 41.3 percent probability that rates will be at 1.00-1.25 percent, 45.2 percent probability that rates will be at 1.25-1.50 percent, 12.6 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.
- May 2018 meeting: Market is attaching 39.6 percent probability that rates will be at 1.00-1.25 percent, 45 percent probability that rates will be at 1.25-1.50 percent, 14 percent probability that rates will be at 1.50-1.75 percent, 1.4 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 31.6 percent probability that rates will be at 1.00-1.25 percent, 43.9 percent probability that rates will be at 1.25-1.50 percent, 20.2 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, and 0.3 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 three weeks ago. Hike odds have diminished by 5-7percentage points across the board.
- The financial market is no longer pricing the third hike in December, instead, the next hike is priced in March 2018 with 61 percent probability.
- In the past one month, hike odds have declined fast. For example, the market was pricing 71 percent chance of the next hike in March 2018, it has now declined to 57 percent.
- We are currently expecting the third rate hike in December and the beginning of balance sheet trimming in September.
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