Following the dovish surprise last week by the Fed, which not only declined to hike rates but also reduced its economic forecasts and cited international worries as key downside risks to its mandates, Fed Funds futures immediately priced in lower probability of a hike at the December and October meetings. The current market thinking is that the FOMC will be unlikely to effect its first hike at a meeting without a press conference, so it’s no surprise to see a structurally lower odds of hike for the October meeting. For the December meeting, though, the market is currently pricing in odds of about just 1 in 3, and as stock markets fall around the world those odds are deteriorating.
A note on how we made this chart: the October series is based on the difference between October and November Fed Funds futures, as the October meeting will only leave two days (October 29th and 30th, as Fed Effective will shift the day after a hike is announced). For the December series, we took the Fed Funds future from December, adjusted for the number of days in the month the contract would be unchanged from November and the number of days a hike would take effect, and looked at the difference in the remainder from November. Both series are independent probabilities: in other words, the market is pricing in a 32% chance of a hike in December regardless of whether there’s a hike in October or not.