Fed Hike aftermath Series: Hike probabilities over next 12 months

Despite hawkish rhetoric from FOMC policy makers such as William Dudley earlier this month, the hike odds are declining across the meeting as the economic numbers including inflation continue to disappoint to the downside, coupled with political gridlock in Washington and ongoing geopolitical crisis. In addition to that, some policymakers have expressed doubts over the third hike for the year due to low inflation levels. However, still, a majority of the policymakers are still hawkish on the hike outlook. In light of that, let’s take a look at the market pricing of hikes.  The current interest rate is at 1.00-1.25 percent.  (Note, all calculations are based on data as of 22nd August)

• September 20th meeting: Market is attaching 95.9 percent probability that rates will be at 1.00-1.25 percent, and 4.1 percent probability that rates will be cut to 0.75-1.00 percent.
   
• November 1st meeting:  Market is attaching 94.1 percent probability that rates will be at 1.00-1.25 percent, 1.9 percent probability that rates will be at 1.25-1.50 percent, and 4 percent probability that rates will be cut to 0.75-1.00 percent.
   
• December 13th meeting: Market is attaching 56.8 percent probability that rates will be at 1.00-1.25 percent, 40 percent probability that rates will be at 1.25-1.50 percent, 0.8 percent probability that rates will be at 1.50-1.75 percent, and 2.4 percent probability that rates will be cut to 0.75-1.00 percent.
   
• January 2018 meeting: Market is attaching 55.7 percent probability that rates will be at 1.00-1.25 percent, 40.4 percent probability that rates will be at 1.25-1.50 percent, 1.6 percent probability that rates will be at 1.50-1.75 percent, and 2.3 percent probability that rates will be cut to 0.75-1.00 percent.
   
• March 2018 meeting: Market is attaching 46.7 percent probability that rates will be at 1.00-1.25 percent, 43 percent probability that rates will be at 1.25-1.50 percent, 8.2 percent probability that rates will be at 1.50-1.75 percent, 0.3 percent probability that rates will be at 1.75-2.00 percent and 1.9 percent probability that rates will be cut to 0.75-1.00 percent.
   
• May 2018 meeting: Market is attaching 45.2 percent probability that rates will be at 1.00-1.25 percent, 42.2 percent probability that rates will be at 1.25-1.50 percent, 10.1 percent probability that rates will be at 1.50-1.75 percent, 0.7 percent probability that rates will be at 1.75-2.00 percent, and 1.9 percent probability that rates will be cut to 0.75-1.00 percent.
   
• June 2018 meeting: Market is attaching 36.5 percent probability that rates will be at 1.00-1.25 percent, 42.8 percent probability that rates will be at 1.25-1.50 percent, 16.5 percent probability that rates will be at 1.50-1.75 percent, 2.5 percent probability that rates will be at 1.75-2.00 percent, 0.1 percent probability that rates will be at 2.00-2.25 percent, and 1.5 percent probability that rates will be cut to 0.75-1.00 percent
   

The probability is suggesting,

• There has been a lot of changes since our last review more than a week ago. Hike odds have not only diminished by 1-2 percentage points across the board, the market is currently attaching probabilities to rate cut not just for 2017 but 2018 also.
• The financial market is still not pricing the third hike in December, instead, the next hike is priced in March 2018 with 51.4 percent probability. Hike probability has declined by almost 4 percent for March since the last review.
• We are currently expecting the third rate hike in December and the beginning of balance sheet trimming in September. 

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