Thursday, January 15, 2015

Revised 2015 Fed Interest Rate Outlook - Liftoff in October, 0.50% at Year-end

Just last Sunday I offered a forecast for the Fed's fed funds target rate in 2015 based on the price of fed funds futures contracts tracked by the CME Group FedWatch web page. Some anxiety about the economy has already spread in the markets since then. My previous forecast was for liftoff, the first hike, to 0.50%, in September, with a further hike to 0.75% by the end of the year. Now, today, based on updated data from CME Group, the probability of liftoff in September is only 32% and just a hair over 50% in October. The chance of a hike in June is now only 8%. The odds of the rate being 0.75% (or higher!) in January 2016 are only about 44%, so the rate is likely to be still at 0.50% in both December and January.

My new, revised forecast is that liftoff will occur in October, and that the fed funds target rate will remain at 0.50% through the end of the year. The CME Group web page doesn't have probability data beyond January. To be clear, there will be only a single hike this year, either in October or December, and a second hike to 0.75% no sooner than February of next year.

In truth it is actually only a 50/50 coin flip whether liftoff occurs in October or December, but I'll go out on a limb and stick with October for now.

And this revised forecast should itself be taken with a grain of salt, coming as it has a mere four days after my previous forecast. I will continue to revise my own forecast as the CME Group FedWatch probabilities change either the month of liftoff or the pace of hikes. That said, I expect that this forecast will hold a bit longer this time.

To be clear, the Fed has not yet made any definitive statements about the pace of hikes after liftoff, so at a minimum we should not presume that rates would rise at a methodical 0.25% pace at every FOMC meeting. I would expect the Fed to start offering preliminary guidance about the presumed pace of hikes at their August Jackson Hole conference, or maybe at their July or September regular FOMC meetings.

The real bottom line here is that no matter what, Fed interest rates will remain very low for the entire year, so any silly talk of rising interest rates hammering stocks this year is pure crap.

-- Jack Krupansky


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