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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