FOMC Watch: Why Fed’s Balance Sheet Language Will Trump Interest Rate Hikes

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Global financial markets, economists and consumers alike are all about to get a fresh diagnosis on the growth expectations of the economy. The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve will begin a two-day meeting on Tuesday, June 13. The official decision will be announced through major media outlets at roughly 2:00 p.m. Eastern Time on Wednesday, June 14.

The view of 24/7 Wall St. is that investors and economic watchers need to pay more attention to commentary and implications of the Fed’s balance sheet rather than the formal rate hike announcement. As of May 29, 2017, the Fed’s balance sheet was a whopping $4.459 trillion. Some Fed presidents and governors have been more open in recent weeks and months about the idea of ratcheting down at least some aspects of the Fed’s balance sheet, but the devil in the details should be what calms or spooks Wall Street and Main Street alike.

It is already widely expected that there will be a FOMC rate hike on federal funds at the June meeting, with all forecasters looking for a 0.25% hike to the range. The FOMC will also release its near-term and longer-term forecasts, and then at 2:30 Federal Reserve Chair Janet Yellen will have a press conference where she rereads the news and then takes questions and answers.

The CME’s 30-day fed funds interest rate future is now priced at $98.965, which suggests more than a 100% chance that the target rate will move to above 1.00% from the current 0.75% to 1.00% range.

What is now up for grabs is just how aggressive the FOMC will be on rate hikes after June. It earlier had been expected that one or two more rate hikes in fed funds would come after the June hike in 2017. Now it remains up for debate on whether that next hike will come in December of 2017 or in January of 2018.

A more simple view on when rate hikes actually will come is from the CME’s FedWatch Tool. This spells it all out in plain percentages, and that suggested on Friday that there was a 99.6% chance that the FOMC would raise fed funds to a 1.00% to 1.25% range for the June meeting.

Again, it is further out the curve that rate hikes are up for debate. As far as when fed funds will be raised to a 1.25% to 1.50%, the odds are as follows:

  • 2.8% at the July 26, 2017 meeting
  • 23.4% at the September 20, 2017 meeting
  • 25.0% at the November 1, 2017 meeting
  • 40.1% at the December 13, 2017 meeting

It is 2018 where the argument for a rate hike becomes more murky. The FedWatch Tool shows a 48.7% chance that fed funds will still be in a 1.00% to 1.25% range and a 40.5% chance that they will be in the 1.25% to 1.50% range. To make matters even more unpredictable, there was a 10% chance that the fed funds rate will be in a range of 1.50% to 1.75%.