The Market vs. The Fed Update

The Daily Reckoning – Jim Rickards: The Fed Has Hit the ‘Pause’ Button
No rate hikes are coming at the July, September or November Fed FOMC meetings. The earliest rate hike might be at the December 13, 2017 FOMC meeting, but even that has a less than 50% probability as of today. I’ll update those probabilities using my proprietary models in the weeks and months ahead. The white flag of surrender came in two public comments by two of the only four FOMC members whose opinions really count. The four voting members of the FOMC worth listening to are Janet Yellen, Stan Fischer, Bill Dudley and Lael Brainard.

Summary

The market has 1.5 hikes priced in through the end of 2018 with no more hikes expected this year. The Fed’s June update to its Summary of Economic Projections predicted 1 more hike this year and three next year. The market and the Fed are once again on different pages. Go with the market as it has a better track record.

Comment

The Fed last updated their Summary of Economic Projections at the June FOMC meeting with an expectation for one more rate hike by the end of 2017 and an additional three by the end of 2018. This would leave the targeted funds rate at 1.375% as 2017 comes to a close and 2.125% by the end of 2018.

But, as the chart below shows, the market is not pricing in another hike this year. The odds of a hike at the September meeting are just 10% while the odds of a December hike are 42%.

Expressed another way, the market has 0.4 more hikes priced in for this year while the Fed expects one more hike. By the end of 2018, the market expects 1.5 more hikes while the Fed expects a total of four.