Fed rate outlook for 2015 - down to 59% chance of Liftoff in September, up to %71 chance of second hike in December, up to 59% chance of third hike in January

The main change to the Fed rate outlook from a week ago is that the certainty of liftoff in September as opposed to October waffled a bit, while the certainty of the second and third hikes in December and January increased modestly.

I'm updating my outlook for Fed rate hikes in 2015 to put a 59% chance (down from 63% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September, a 71% chance of a second hike (to 0.75%) in December (up from 63% a week ago), and a 59% chance of a third hike to 1.00% in January 2016 (up from 54% a week ago.)

The odds for a second hike in October are only 44% (down from 48.61% a week ago), still close to a coin flip, but not enough sense of conviction to call it likely.

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

http://www.cmegroup.com/trading/interest-rates/fed-funds.html

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 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:

http://www.newyorkfed.org/markets/survey/2014/December_result.pdf

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

http://www.reuters.com/article/2015/02/06/us-usa-fed-poll-idUSKBN0LA2DX20150206

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

http://in.reuters.com/article/2015/01/15/us-g20-economy-usa-idINKBN0KO1N520150115

That same poll this past week 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:

http://www.reuters.com/article/2015/02/11/us-economy-poll-usa-idUSKBN0LF1M620150211

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 43% (down from 46% a week ago), and 20% in June (down from 24% a week ago.)

-- Jack Krupansky