Sunday, January 11, 2015

Outlook for Fed rate hikes in 2015 - Liftoff in September, 0.75% at year-end

For a while people had been expected a first Fed rate hike in March, but enthusiasm for that target date has clearly evaporated. If you asked the average market participant today, they would probably say that liftoff will occur in June, but recent Fed funds futures contracts reported by the CME Group indicate only a 17% chance of a first hike in June, a 37% chance in July, and finally a 52% chance in September.

According to Fed funds futures, there is actually still a 2% chance of a first hike in March, but that is probably more of a hedge than an outright bet.

September is nine months away, which is way too far for any reliable economic predictions. Still, I think it is a good bet, since the decision to start rate hikes will likely be more a matter of the passage of enough time without any bad news and with enough gradual improvement so that the Fed can feel confident that they will not have to reverse their decision in the following months, rather than triggering the first hike on some set of economic indicators hitting some specific target numbers.

The Fed will probably start rate hikes at least a few months after a lot of the experts on Wall Street give the Fed the go ahead. The Fed will probably intentionally stay "behind the curve" since their goal is to be conservative rather than to be aggressive and shoot from the hip. So, expect to hear a growing choir of voices clamoring feverishly for rate hikes in April, May, June, and July. By early summer, if not May, expect people to be increasingly repeating the mantra of "the Fed is behind the curve!".

Even if everything does look right for a hike in late June or July, the Fed will probably wait until the summer is over so that everyone is fully prepared for what lies ahead. I expect that they will use their annual policy conference in Jackson Hole, Wyoming in late August to prepare people for what will come in September.

Granted, any number of shocks or surprises could occur in the economy over the next nine months, but that's also enough time for the economy to recover from any minor and even major major hiccups. Besides, predictions and forecasts are always made assuming that events proceed and evolve as expected. But, as of right now, September looks primed to be the point of liftoff.

The CME Group FedWatch web page suggests that the Fed will make a quarter point hike in September, October, and December, so the Fed funds target rate should close the year at 0.75%.

Sure, that is a healthy bump from essentially zero, but is still way too low to have any significant impact on the vast majority of companies. Sure, the stock market may react in late 2015 to expectations of higher rates in 2016, but once again, that is still too fat out in the future for ADHD-afflicted Wall Street traders and short-term speculators.

The CME Group FedWatch web page:

-- Jack Krupansky

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