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Yesterday, in its monetary policy announcement Fed signaled another hike by the end of the year and initiated the balance sheet reduction beginning October. 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 8th September)
- November 1st meeting: Market is attaching 97.9 percent probability that rates will be at 1.00-1.25 percent, and 2.1 percent probability that rates will be at 1.25-1.50 percent.
- December 13th meeting: Market is attaching 27.1 percent probability that rates will be at 1.00-1.25 percent, 71.4 percent probability that rates will be at 1.25-1.50 percent, and 1.5 percent probability that rates will be at 1.50-1.75 percent.
- January 2018 meeting: Market is attaching 26 percent probability that rates will be at 1.00-1.25 percent, 69.6 percent probability that rates will be at 1.25-1.50 percent, 4.4 percent probability that rates will be at 1.50-1.75 percent, and 0.1 percent probability that rates will be at 1.75-2.00 percent.
- March 2018 meeting: Market is attaching 21.6 percent probability that rates will be at 1.00-1.25 percent, 62.2 percent probability that rates will be at 1.25-1.50 percent, 15.4 percent probability that rates will be at 1.50-1.75 percent, and 0.8 percent probability that rates will be at 1.75-2.00 percent.
- May 2018 meeting: Market is attaching 21.6 percent probability that rates will be at 1.00-1.25 percent, 62.2 percent probability that rates will be at 1.25-1.50 percent, 15.4 percent probability that rates will be at 1.50-1.75 percent, and 0.8 percent probability that rates will be at 1.75-2.00 percent.
- June 2018 meeting: Market is attaching 16.2 percent probability that rates will be at 1.00-1.25 percent, 52 percent probability that rates will be at 1.25-1.50 percent, 27.1 percent probability that rates will be at 1.50-1.75 percent, 4.4 percent probability that rates will be at 1.75-2.00 percent, and 0.2 percent probability that rates will be at 2.00-2.25 percent.
The probability is suggesting,
- There has been a lot of changes since our last review less than a week ago.
- Hike odds have increased sharply, especially for December by more than 20 percent as FOMC maintained its outlook for a third hike this year.
- It is, however, important to note that the market is not pricing any hike for the first half of 2018.
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