Friday, February 20, 2015

Fed rate outlook for 2015 - down to 58% chance of Liftoff in September, down to %58 chance of second hike in December, down to 49% chance of third hike in January

The main change to the Fed rate outlook from a week ago is that people were persuaded by reading the minutes of the last Fed FOMC meeting that were released on Thursday that the Fed really would be more patient than they had expected, so any sense of liftoff in June or July got tamped down further. September is still a go for liftoff, a second hike is likely in December, but a third hike in January now looks iffy, not quite a coin flip (49.19%.)

I'm updating my outlook for Fed rate hikes in 2015 to put a 58% chance (down from 59% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September, a 58% chance of a second hike (to 0.75%) in December (down from 71% a week ago), and only a 49% chance or coin flip of a third hike to 1.00% in January 2016 (down from 59% a week ago.)

The odds for a second hike in October are only 43% (down from 44% a week ago), not really even close to a coin flip.

My forecast is based on the fed funds futures probabilities provided by the CME Group FedWatch web page:

These numbers are based on fed funds futures contract prices, so they are what actual market participants are betting, not the mere whim of some economist or pundit - or even the Federal Reserve itself.

A Reuters report from Thursday claims that a Fed survey of primary dealers for Treasury debt from January indicated a median expectation of June for liftoff, with September as the next most likely time frame.

That Fed survey is here:

My own reading of that survey, in particular question 3a, is that respondents were indicating a 33% chance of liftoff by June, 43% by July, and 64% by September, with 57% expecting liftoff in September or later. Clearly my reading is at odds with the conclusion of the Reuters reporter.

A NY Fed poll of the 22 primary dealers for Treasury debt taken in early December had September as the expected monthly FOMC meeting for liftoff with 67% chance given by survey participants and only 40% chance in June:

A Reuters poll of the primary dealers two weeks ago showed 10 out of 19 indicating June for liftoff:

A Reuters poll of 82 economists a month ago had two-thirds with Liftoff in June:

That same poll a week ago had 36 of 82 economists (44%) pointing to June and 18 pointing to September. The headline says "Fed to hike rates in June", but 36 is less than half of the economists, so to me that indicates that June is a less likely time for liftoff. See:

Yes, we see lots of financial media reports talking about liftoff in June, some even allegedly based on fed funds futures, which seems odd given the data shown at the CME Group link given above. My take is that these people are simply lobbying for when they think or want the Fed to act, rather than literally reading the fed funds futures. Granted, it is still very possible that the economy will strengthen more than expected in the coming months and force the Fed to move up liftoff to June, but fed funds futures are still our best forecast for now.

Incidentally, the CME Group odds for liftoff in July are now 39% (down from 43% a week ago), and 18% in June (down from 20% a week ago.)

-- Jack Krupansky


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