Monday, March 16, 2015

Fed rate outlook for 2015 - down to 56% chance of Liftoff in September, down to 55% chance of second hike in December, down to 43% chance of third hike in January

The five main points about the Fed rate outlook for this week are: 1) the patient language is likely to be removed from the FOMC statement on Wednesday, 2) Although the FOMC wants the flexibility to hike in June, they will not do so, 3) September is still the most likely time frame for liftoff, 4) even at the end of the year the fed rate will be only 0.75%, and 5) even in January through mid-March of next year the fed rate will remain 0.75%. IOW, there is very little reason to be concerned about any impact of interest rates on stocks for a full year from now.

I'm updating my outlook for Fed rate hikes in 2015 to put a 56% chance (down from 66% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September, no second hike in October (only a 40% chance vs. 54% a week ago), a 55% chance of a second hike in December, and no third hike (to 1.00%) in January (only 40% chance vs. 66% a week ago.)

IOW, the fed funds target rate will be only 0.75% at the end of the year - and through January and 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.

Some people are betting on liftoff in July and even June, but that may be more of a hedge rather than an outright bet.

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 37% (down from 45% a week ago), and 18% in June (down from 22% a week ago.)

-- Jack Krupansky

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