Sunday, March 22, 2015

Fed rate outlook for 2015 - 67% chance of Liftoff in October, 62% chance of second hike in January

The big takeaway from the Fed on Wednesday was that although they would start raising rates relatively soon, it would not be as soon as expected and would be at a slower pace than expected.

The FOMC dot plot indicates that the rate would likely be no higher than 0.75% at the end of the year, and could well be only 0.50% - midpoint of 0.625%. Fed funds futures are indicating a second hike to 0.75% in January and no hike in March 2016. In other words, a benign rate environment for stocks for an entire year, minimum.

The Fed did reaffirm that it will be data-driven, so fed funds futures are being based on market expectations for how the data will evolve over the next year. In any case, a later and slower path for rising interest rates is considered good for stocks.

I'm updating my outlook for Fed rate hikes in 2015 and early 2016:

1. Liftoff in October - 67% chance.
2. Second hike, to 0.75% in January - 62% chance.
3. No Third hike at March 2016 FOMC meeting - 44% chance of hike to 1.00%.
4. There is some possibility that liftoff may occur in September, but it is unlikely - 46% chance, less than a coin flip.

IOW, the fed funds target rate will be only 0.50% at the end of the year - and only 0.75% from January up to the March FOMC meeting a year from now, which is a rate that is still very supportive of stocks and the stock market.

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.

Incidentally, the CME Group odds for liftoff in July are now only 24% (down from 37% a week ago), and 9% in June (down from 18% a week ago.)

-- Jack Krupansky

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