The Federal Reserve has officially removed any commitment to holding the Fed Funds rate between 0 and 25 bps at each meeting. That doesn’t mean they will immediately hike of course, but they now have the option to hike. Bespoke clients get regular updates on FOMC communications, economic developments that feed into the Fed’s “data dependent” policy stance, as well as market pricing updates on changing expectations for the path of FOMC policy. On this blog, we regularly post the tool below. It measures the date of and months remaining until the first month where a move from the current Fed Funds effective rate to one 25 bps higher is fully reflected in the price of the Fed Funds future covering that month. Over the last few weeks, Fed Funds futures have risen in price, reflecting a decline in the probability implied by the market that interest rates would increase soon. At current levels, the futures market is pricing in that hike more than 7 months from now in February 2016
Another way to think about rate hikes is to calculate the probability of a hike for a specific month. Again, we use Fed Funds futures prices and assumptions about how a rate hike will play out in terms of day count and the size of the hike. The chart below shows that probability for the month of September over time. We would note that “100%” probabilities also include the chance that the Fed could hike in June (this didn’t happen) or July (this is extremely unlikely to happen). The key takeaway from both our Countdown To Liftoff and the chart below is that a Fed hike is getting increasingly less and less likely in 2015.