Fed Hike aftermath Series: Hike odds decline further ahead of FOMC meeting this week

FOMC policymakers are set to meet this week and announce their monetary policy decision on Wednesday. Not much is expected from this meeting, where no press conference would be held. According to Fed projections in June, the policy makers are expected to hike interest rates by another 25 basis points this year but that is not expected to happen until the December meeting. In addition to that, Fed has also outlined its asset reduction plan in June. The plan suggests that Fed would wind down its balance sheet via a reduction in reinvestments rather than the direct selling of assets. The reduction in reinvestments would initially begin with $10 billion per month and the amount will see an increment of $10 billion every 3 months until it reaches a ceiling of $60 billion per month.

While FOMC policymakers remain quite upbeat on the economic outlook, the market is not so sure of the third rate hike this year. The probability of the third hike in December now stands at 47 percent. In our last hike odds review last week, we noticed that the market is pricing the next hike in March. Last week, the pricing of the March hike was at 63 percent probability, however, it has slid further since then and is currently at 58 percent.

With FOMC hike hopes receding further while other central banks have been turning hawkish towards monetary policies, the dollar has declined to the lowest point since May 2016. The dollar index, which is the value of the dollar against a basket of currencies is currently trading at 93.73.