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Fed Hike aftermath Series: Hike probability spiked after FOMC decision

Yesterday, in its monetary policy announcement Fed signaled another hike by the end of the year and initiated the balance sheet reduction beginning October. 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)

  • November 1st meeting: Market is attaching 97.9 percent probability that rates will be at 1.00-1.25 percent, and 2.1 percent probability that rates will be at 1.25-1.50 percent.
  • December 13th meeting: Market is attaching 27.1 percent probability that rates will be at 1.00-1.25 percent, 71.4 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.
  • January 2018 meeting: Market is attaching 26 percent probability that rates will be at 1.00-1.25 percent, 69.6 percent probability that rates will be at 1.25-1.50 percent, 4.4 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 21.6 percent probability that rates will be at 1.00-1.25 percent, 62.2 percent probability that rates will be at 1.25-1.50 percent, 15.4 percent probability that rates will be at 1.50-1.75 percent, and 0.8 percent probability that rates will be at 1.75-2.00 percent.
  • May 2018 meeting: Market is attaching 21.6 percent probability that rates will be at 1.00-1.25 percent, 62.2 percent probability that rates will be at 1.25-1.50 percent, 15.4 percent probability that rates will be at 1.50-1.75 percent, and 0.8 percent probability that rates will be at 1.75-2.00 percent.
  • June 2018 meeting: Market is attaching 16.2 percent probability that rates will be at 1.00-1.25 percent, 52 percent probability that rates will be at 1.25-1.50 percent, 27.1 percent probability that rates will be at 1.50-1.75 percent, 4.4 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 less than a week ago.
  • Hike odds have increased sharply, especially for December by more than 20 percent as FOMC maintained its outlook for a third hike this year.
  • It is, however, important to note that the market is not pricing any hike for the first half of 2018.

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