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FOMC increased interest rates in March and June and increased its forecast from three rate hikes in 2018 to four rate hikes. June decision was unanimous. Current Federal funds rate - 175-200 bps (Note, all calculations are based on data as of 25th June)
- August 2018 meeting: Market is attaching 100 percent probability that rates will be at 1.75-2.00 percent.
- September 2018 meeting: Market is attaching 29.2 percent probability that rates will be at 1.75-2.00 percent, and 70.8 percent probability that rates will be at 2.00-2.25 percent.
- November 2018 meeting: Market is attaching 27.7 percent probability that rates will be at 1.75-2.00 percent, 68.6 percent probability that rates will be at 2.00-2.25 percent, and 3.7 percent probability that rates will be at 2.25-2.50 percent.
- December 2018 meeting: Market is attaching 11 percent probability that rates will be at 1.75-2.00 percent, 43.9 percent probability that rates will be at 2.00-2.25 percent, 42.8 percent probability that rates will be at 2.25-2.50 percent, and 2.2 percent probability that rates will be at 2.50-2.75 percent.
- January 2019 meeting: Market is attaching 10.1 percent probability that rates will be at 1.75-2.00 percent, 40.3 percent probability that rates will be at 2.00-2.25 percent, 42.4 percent probability that rates will be at 2.25-2.50 percent, and 7 percent probability that rates will be at 2.50-2.75 percent, and 0.3 percent probability that rates will be at 2.75-3.00 percent.
The probability is suggesting,
- Since our last review a week ago, the probabilities have softened.
- The market is pricing the third hike for 2018 in September and pricing it with 70.8 percent probability compared to 83.3 percent a week ago.
- The market is pricing the fourth hike in December with 49.7 percent probability instead of 53.4 percent probability just a week ago.
- It is important to note that despite Fed’s forecast, the market is not ready to price in a fourth hike.
