Odds Overwhelmingly Favor FOMC Interest Rate Hike in December

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There is going to be some serious food for thought in the coming weeks. As 2016 comes to an end, there has been a substantial post-election rally around the notion that Donald Trump as President is going to be more focused on business and growth. Stocks have risen and oil has recovered on a formal OPEC production cut, but bond yields have unilaterally risen as well. What matters now is that a Federal Reserve rate hike looks almost certain for the December 14 FOMC meeting.

254/7 Wall St. has tracked the chance of an interest rate for hike some time. Now the CME even has its own FedWatch Tool. This is a reading that is based around CME Group 30-Day Fed Fund futures prices. This tool evaluates the likelihood of changes in U.S. monetary policy and the probability of FOMC interest rate changes for upcoming FOMC meetings.

Prior to Friday’s BLS employment situation report the FedWatch Tool was calling for closer to a 98% chance of Fed Funds rate hike. The current 0.25% to 0.50% rate has been in place for a year. As a reminder, the last and only rate hike since the great recession was in December of 2015, where the Fed Funds target range was raised from the 0.00% to 0.25% target range in what was called the zero interest rate policy (ZIRP).

The current Federal Reserve never did adopt the negative interest rate policy (NIRP) that Europe and Japan have adopted. Now we have even seen in the last month with rising yields that the trillions of dollars worth of negative sovereign debt yields has contracted massively after peaking this summer.

As of Friday’s close, again after the employment report from the Department of Labor, the FedWatch Tool gives a 92.7% chance that Janet Yellen and the voting members of the FOMC will vote to raise the Fed Funds target up to a range of 0.50% to 0.75%. The reflation trade also seems back on.

With stocks at or close to all-time highs, the 10-year Treasury note’s yield has risen from 1.79% at the end of October up to 2.35% as of Thanksgiving and to 2.39% as of December 2. Let’s just say that a 0.60% rally in yields in that short time is far from normal.

Over half of the 20+ Fed head speeches and testimony two weeks ago had a bias toward tightening. That feels even stronger now.

Inflation is in no cases close to the 2.5% top end of the Fed’s target range, but the Fed is starting to get more cover around that 2.0% inflation mark in some instance.

While this is an outside reading and not an official Federal Reserve estimate, the Atlanta Fed’s GDPNow tool on December 1 was targeting fourth quarter GDP growth of 2.9% for the fourth quarter of 2016 — up from a prior 2.4% estimate on November 30. That report said:

The forecasts of fourth-quarter real residential investment growth and real government spending growth increased from 7.1 percent to 12.4 percent and 0.1 to 0.6 percent, respectively. The forecast of real nonresidential structures investment growth fell from 1.4 percent to -3.4 percent after the same report. The forecasts of real consumer spending growth and real nonresidential equipment investment growth increased from 2.2 percent to 2.5 percent and 4.6 to 6.6 percent, respectively, after this morning’s Manufacturing ISM Report on Business from the Institute of Supply Management and the incorporation of earlier released November data in the model’s estimate of its dynamic economic activity factor. The factor is used to forecast yet-to-be released monthly source data for GDP.

Even considering a Fed Beige Book dominated by modest/moderate commentary, a December interest rate seems almost certain. That being said, there is still a week and half worth of data that can come out. And we still have the Federal Reserve and voting members of the FOMC team in place through the end of this year. That same team has found many reasons not to raise interest rates in 2016.