Fed Hike aftermath Series: Hike probabilities over next 12 months

FOMC increased interest rates again in March and maintained its forecast for three rate hikes in 2018. FOMC also forecasted a faster pace of hikes next year than previously forecasted. March decision was unanimous. Current Federal funds rate - 150-175 bps (Note, all calculations are based on data as of 16th April)

• May 2018 meeting: Market is attaching 99.5 percent probability that rates will be at 1.50-1.75 percent, and 0.5 percent probability that rates will be at 1.75-2.00 percent.  
   
• June 2018 meeting: Market is attaching 99.5 percent probability that rates will be at 1.75-2.00 percent, and 0.5 percent probability that rates will be at 2.00-2.25.
   
• August 2018 meeting: Market is attaching 93.5 percent probability that rates will be at 1.75-2.00 percent, and 6.5 percent probability that rates will be at 2.00-2.25 percent.
   
• September 2018 meeting: Market is attaching 29.6 percent probability that rates will be at 1.75-2.00 percent, 66 percent probability that rates will be at 2.00-2.25 percent, and 4.4 percent probability that rates will be at 2.25-2.50 percent.
   
• November 2018 meeting: Market is attaching 34.4 percent probability that rates will be at 1.75-2.00 percent, 61.4 percent probability that rates will be at 2.00-2.25 percent, 9.8 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.
   
• December 2018 meeting: Market is attaching 16 percent probability that rates will be at 1.75-2.00 percent, 46.3 percent probability that rates will be at 2.00-2.25 percent, 32.9 percent probability that rates will be at 2.25-2.50 percent, 4.6 percent probability that rates will be at 2.50-2.75 percent, and 0.2 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 for both near months and for far months.
• Next hike is priced in June with 99.5 percent probability, instead of 85.2 percent a week ago.
• The market brought forwarded the third hike for 2018 in September and pricing it with 70.4 percent probability compared to 51.3 percent a week ago.
• The market is pricing the fourth hike in December with 37.7 percent probability instead of 27.1 percent probability just a week ago.

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