Fed Hike aftermath Series: Hike probabilities over next 12 months

FOMC increased interest rates again in December for the third time in 2017 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, however, started pricing the third hike in December. 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 12th March)

• March 2018 meeting: Market is attaching 5.6 percent probability that rates will be at 1.25-1.50 percent, and 94.4 percent probability that rates will be at 1.50-1.75 percent.
   
• May 2018 meeting: Market is attaching 5.2 percent probability that rates will be at 1.25-1.50 percent, 88.9 percent probability that rates will be at 1.50-1.75 percent, and 5.9 percent probability that rates will be at 1.75-2.00 percent.  
   
• June 2018 meeting: Market is attaching 1 percent probability that rates will be at 1.25-1.50 percent, 22 percent probability that rates will be at 1.50-1.75 percent, 72.3 percent probability that rates will be at 1.75-2.00 percent, and 4.7 percent probability that rates will be at 2.00-2.25.
   
• August 2018 meeting: Market is attaching 0.9 percent probability that rates will be at 1.25-1.50 percent, 19.5 percent probability that rates will be at 1.50-1.75 percent, 66.3 percent probability that rates will be at 1.75-2.00 percent, 12.8 percent probability that rates will be at 2.00-2.25 percent, and 0.6 percent probability that rates will be at 2.25-2.50 percent.
   
• September 2018 meeting: Market is attaching 0.3 percent probability that rates will be at 1.25-1.50 percent, 7.9 percent probability that rates will be at 1.50-1.75 percent, 37.1 percent probability that rates will be at 1.75-2.00 percent, 46.2 percent probability that rates will be at 2.00-2.25 percent, 8.2 percent probability that rates will be at 2.25-2.50 percent, and 0.4 percent probability that rates will be at 2.50-2.75 percent.
   
• November 2018 meeting: Market is attaching 0.3 percent probability that rates will be at 1.25-1.50 percent, 6.7 percent probability that rates will be at 1.50-1.75 percent, 32.5 percent probability that rates will be at 1.75-2.00 percent, 44.7 percent probability that rates will be at 2.00-2.25 percent, 14.1 percent probability that rates will be at 2.25-2.50 percent, and 1.7 percent probability that rates will be at 2.50-2.75 percent.
   
• December 2018 meeting: Market is attaching 0.2 percent probability that rates will be at 1.25-1.50 percent, 4.1 percent probability that rates will be at 1.50-1.75 percent, 21.8 percent probability that rates will be at 1.75-2.00 percent, 39.7 percent probability that rates will be at 2.00-2.25 percent, 26.8 percent probability that rates will be at 2.25-2.50 percent, 6.8 percent probability that rates will be at 2.50-2.75 percent, and 0.7 percent probability that rates will be at 2.75-3.00 percent.
   

The probability is suggesting,

• Since our last review a week ago, the probability tightened in favor of rate hikes.
• Next hike is priced in March with 94.4 percent probability, instead of 88.8 percent a week ago.
• The market brought forwarded the second hike for 2018 in June and pricing it with 77 percent probability compared to 76.9 percent a week ago.
• The market is pricing the third hike in December with 74 percent probability instead of 73.5 percent probability just a week ago.

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