Friday, February 06, 2015

Fed rate outlook for 2015 - up to 63% chance of Liftoff in September, %63 chance of second hike in December, 54% chance of third hike in January

As a result of the reasonably strong jobs report today, fed funds futures are now showing a stronger chance of an earlier liftoff - September rather than October.

I'm updating my outlook for Fed rate hikes in 2015 to put a 63% chance (up from 38% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September rather than October as it was a week ago, a 63% chance of a second hike (to 0.75%) in December, and a 54% chance of a third hike to 1.00% in January 2016.

The odds for a second hike in October are only 48.61%, 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:

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:

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

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 significantly 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 46%, and 24% in June. June had an 11% chance a week ago.

-- Jack Krupansky

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