What to Expect for Fed Rate Hikes in December and in 2017

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24/7 Wall St. wanted to give investors, business owners, and consumers a heads up for what to expect in the weeks ahead. The presidential election is over, the Federal Reserve wants to raise interest rates, and for the first time in years investors are talking about major structural growth initiatives being seen in the market. Regardless of whether a vote was cast for Clinton or for Trump, the rise in the stock market to all-time highs and the rapid rise in bond yields has just been too large to ignore.

The week of November 21 to 25 will be a very odd week due to the Thanksgiving holiday. Then that is followed by Black Friday and markets are only open a half-day on Friday. If Wednesday is the busiest travel day of the year on the highways and in the airports, then you know many investors will have their foot out the door either on Tuesday or on Wednesday morning.

What investors absolutely have to get used to under this post-election cycle into year-end is that the Federal Reserve looks overwhelmingly as though a Fed Funds rate hike is coming in December. They wanted to avoid any presidential election fallout, but inflation is getting close enough to the Fed’s target of 2.0% to 2.5% and employment is close enough to full that the Federal Reserve almost has no choice but to act.

Bloomberg’s report suggested that Thursday’s consumer price index report will not be turning up any heat for a rate hike at the December FOMC. That flies against what the hawkish commentary of Federal Reserve presidents and governors said the week ending November 18. We have also seen better than expected reports around consumer confidence and jobless claims were lower than most of us have ever seen in our lives.

Even with Janet Yellen offering testimony, the reality is that there were over 20 instances of Fed heads offering up live commentary and making media appearances. Well over half of those are leaning to rate hikes.

The CME FedWatch Tool breaks down the exact odds for rate hikes, meeting by meeting. That tool now shows a 95.4% chance of Fed Funds in a target range of 0.50% to 0.95% at the December 14 FOMC meeting. That tool’s chances were 90.6% earlier in the week before Yellen’s testimony and before the hawk-bull tabulation had been made in Fed head speeches.

Where things get more cloudy is on future rate hikes. The FedWatch Tool shows a 70.6% that the target rate will be in the same 0.50% to 0.75% range and just a 23.5% chance that the range will be 0.75% to 1.00%.

Then if you go out almost a year to the November 1, 2017 FOMC meeting, the FedWatch Tool odds are 24.0% for a 0.50% to 0.75% range in Fed Funds. Also in November of 2017, there is a 40.1% chance for a 0.75% to 1.00% Fed Funds range and a 25.5% chance that the Fed Funds range will be 1.00% to 1.25%.

For a 100% chance of Fed Funds being above 1.00%, the Fed Funds futures does not go under a 99.00 price (100.00-1.00) until January of 2018. That means there is a bet of certainty that there be just two rate hikes, including this December’s yet-to-come rate hike, for just over a year. The Fed Funds futures do not even show a 100% certainty of Fed Funds being above 1.50% before 2019.

Investors and economists usually believe that action often creates the anticipation of more action. After the first rate hike is made in December, at least the first one in a year anyway, investors should probably start to expect that these odds are more likely than not to rise for future rate hikes.

Something else needs to be considered as well. Many economists and investors have not even seen interest rates above 1.00% or 2.00% in their career at this time, but some of us can remember when interest on the Fed Funds was 4%, 5%, and even up around 10%. That was a long time ago when growth was much higher.

While we are certain a rate hike is in the cards, the reality is that any number of things can get in the way. As of now, that Federal Reserve rate hike looks like a lock for December as of now.

These were the closing levels of major markets for the week ending November 18:

  • DJIA  18,867.93
  • S&P500  2,181.90
  • NASDAQ  5,321.51
  • Crude Oil  $45.58
  • Gold  $1,207.30
  • 10-Yr T-Note  2.335%
  • VIX  12.85