Fed Hike aftermath Series: Hike probabilities over next 12 months

FOMC increased interest rates again this year in December for the third and projected three more hikes in 2018. However, debates among policymakers are growing over hikes as inflation remains low. Charles Evans joined Neel Kashkari in opposing another hike in December. The market is also not ready to price three rate hikes for next year. Let’s look at hike probabilities for the next 12 months.  Current FOMC rate is at 125-150 basis points. (Note, all calculations are based on data as of 18th December)

• January 2018 meeting: Market is attaching 97.9 percent probability that rates will be at 1.25-1.50 percent, and 2.1 percent probability that rates will be at 1.50-1.75 percent.
   
• March 2018 meeting: Market is attaching 40 percent probability that rates will be at 1.25-1.50 percent, 58.8 percent probability that rates will be at 1.50-1.75 percent, and 1.2 percent probability that rates will be at 1.75-2.00 percent.
   
• May 2018 meeting: Market is attaching 36.7 percent probability that rates will be at 1.25-1.50 percent, 57.2 percent probability that rates will be at 1.50-1.75 percent, 6 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 15.6 percent probability that rates will be at 1.25-1.50 percent, 45.4 percent probability that rates will be at 1.50-1.75 percent, 35.5 percent probability that rates will be at 1.75-2.00 percent, 3.5 percent probability that rates will be at 2.00-2.25, and 0.1 percent probability that rates will be at 2.25-2.50 percent.
   
• August 2018 meeting: Market is attaching 14.3 percent probability that rates will be at 1.25-1.50 percent, 43 percent probability that rates will be at 1.50-1.75 percent, 36.3 percent probability that rates will be at 1.75-2.00 percent, 6 percent probability that rates will be at 2.00-2.25 percent, and 0.3 percent probability that rates will be at 2.25-2.50 percent.
   
• September 2018 meeting: Market is attaching 8.8 percent probability that rates will be at 1.25-1.50 percent, 32 percent probability that rates will be at 1.50-1.75 percent, 38.9 percent probability that rates will be at 1.75-2.00 percent, 17.6 percent probability that rates will be at 2.00-2.25 percent, 2.5 percent probability that rates will be at 2.25-2.50 percent, and 0.1 percent probability that rates will be at 2.50-2.75 percent.
   
• November 2018 meeting: Market is attaching 8.7 percent probability that rates will be at 1.25-1.50 percent, 31.2 percent probability that rates will be at 1.50-1.75 percent, 38 percent probability that rates will be at 1.75-2.00 percent, 18.4 percent probability that rates will be at 2.00-2.25 percent, 3.4 percent probability that rates will be at 2.25-2.50 percent, and 0.3 percent probability that rates will be at 2.50-2.75 percent.
   
• December 2018 meeting: Market is attaching 6.2 percent probability that rates will be at 1.25-1.50 percent, 24.7 percent probability that rates will be at 1.50-1.75 percent, 36.1 percent probability that rates will be at 1.75-2.00 percent, 24.1 percent probability that rates will be at 2.00-2.25 percent, 7.7 percent probability that rates will be at 2.25-2.50 percent, 1.3 percent probability that rates will be at 2.50-2.75 percent.
   

The probability is suggesting,

• Since our last review a week ago, the probability for rate hikes has marginally eased, and, the market is still not pricing a hike for December. Next hike is priced in March with 60 percent probability, instead of 61.4 percent a week ago.
• The market is now pricing the second hike in 2018 in September with 59.2 percent probability compared to 59.3 percent probability, a week ago.
   
• The market is pricing the third hike in December with only 33.1 percent probability.

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