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- Rate hike? Not until 2017, says market
Rate hike? Not until 2017, says market
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Loading...The market seems to have given up on a Fed rate hike this year—at least for the time being.
The Chicago Mercantile Exchange’s “FedWatch” tool shows that traders are now betting the Federal Reserve will probably wait until 2017 before another federal funds target rate increase.
The fed funds rate is what banks charge each other for overnight loans using money held at the Federal Reserve. The central bank uses that rate to influence monetary policy.
With GDP data for the fourth quarter of 2015 showing an anemic growth of just 0.7%, the market appears to be second-guessing the idea that the Fed will raise rates four times over the course of 2016. The target rates were raised in December to a range between 0.25% and 0.50% from its previous range of between 0% and 0.25%, where it had been since the end of 2008.
Taking prices from the several CME futures contracts on the fed funds rate, the FedWatch tool assigns probabilities for a rate hike.
“If you look at it just a couple weeks ago, it looked like there was closer to a 50-50 chance of rates going up by September,” said Alan Knuckman, senior strategist at Trading Advantage. “Now that's kind of been taken out of the equation. And if you go out to the December futures, you're seeing that there's less than a 50-50 chance of it happening in December. So essentially, no rate hike this year.”
The earliest date that sees the chance of an increase at anything more than 50% is February 2017.
As Kuckman notes, the Fed would have a long way to go before it returned to its 50-year average fed funds rate target if it were to continue hiking at 0.25% at a clip.
“To get back to normalized rates, which are about 4.5% in short-term interest rates, we would have to raise rates four times a year for about 4 or 5 years,” he said. “So we'd be looking like 2020 to get back to just normal rates.”
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