Economy

How the Coming Fed Funds Rate Hike Timing Looks Today

Jon C. Ogg

Published: December 14, 2015 12:25 pm

Last Updated: January 13, 2020 4:07 pm

This Wednesday potentially, or likely, will mark the end of a trend that has been in place for the entire career of younger workers. That is a fed funds rate hike by Janet Yellen and fellow Federal Reserve presidents who are voting members of the Federal Open Market Committee (FOMC).

The stock and bond markets have started bracing for a rate hike, with December being the month of change. What is interesting, and somewhat in contrast, is that the CME’s 30-day federal funds futures are not at 100% for a rate hike happening at the two-day FOMC meeting for December. Fed funds futures were last seen quoted around $99.7775.

If you use the 99.75 benchmark barometer as the so-called Maginot Line for a rate hike, that might imply an 89% to 90% chance of a rate hike. Still, this not a 100% chance being priced in, even if other metrics are indicating the rate hike is already all but a “done-deal.”

It is very important to understand that the 30-day federal funds futures is merely one of the many barometers used to judge rate hike timing. It has been wrong on many occasions in recent years, mainly due to slower and slower economic growth.

What investors should consider here is that the chances of a fed funds rate hike are well over 100% now for the January time frame. Those federal funds futures were last seen at 99.68, and the 100% probability for a second fed funds rate hike to 0.50% is not seen until June of 2016 (last price seen at 99.495).

Another question to consider is whether Yellen and the FOMC are considering a move from a target rate of 0.00% to 0.25% now up to 0.25% or 0.375%. Both moves would constitute a formal rate hike. That 0.00% to 0.25% has been in place since December of 2008. Prior to this recession, there are no financial market participants around who likely can claim that they ever recall a period of anywhere close to seven years before a change in the Federal Reserve’s interest rate policy was seen.

Bloomberg’s economic calendar said ahead of this week’s meeting:

The first rate hike of the recovery is expected for the FOMC meeting announcement at 2:00 p.m. ET, lifting the fed funds rate to 0.375 percent from a range of zero to 0.25 percent. The assessments of the labor market and of inflation will be closely watched, with the former having improved but the latter remaining soft. FOMC forecasts will also be posted along with the announcement, shortly followed by the Fed Chair press conference. … FOMC Consensus Forecast for Dec. 15 Policy Vote on Fed Funds Target: to 0.375 percent from a range of zero to 0.25 percent.

It is important to consider that there is a changing of the guard for some of the voting members of the Fed after December’s meeting. None of the current voting members have been voting members of the FOMC during any extreme period of rate hikes.

Speaking of rate hike expectations, those 30-day fed funds futures from the CME do not even have a 100% chance of fed funds being up at 1.00% until June of 2017.

The Fed may finally hike rates this week, or it could kick the can down the road just one more meeting. Either way, interest rates are more than just highly accommodative in the current economic and interest rate climate. Perhaps the larger issue is what to think about when the Fed really wants to make a dent on the interest rate picture and yield curve. That will occur, in theory, when the Fed decides to start cutting down on that massive balance sheet, which last stood at $4.48 trillion worth of Treasury, agency and mortgage-backed debt securities.