The market is finally coming around to the idea that the Federal Reserve this year will be raising interest rates a total of four times.
Though some big forecasting firms on Wall Street for months have been predicting a more aggressive Fed, traders thus far had been anticipating three moves this year — the increase already approved in March, plus two more, likely in June and September.
However, the Fed funds futures market Monday morning gave almost a 50 percent probability that the central bank would move one more time in December.
The CME’s FedWatch tool, which has been a reliable gauge for the Federal Open Market Committee’s actions, assigned a 48.2 percent chance in early trade. The move toward a more aggressive Fed game as the benchmark 10-year Treasury note yield hovered around 3 percent, which multiple bond experts have predicted would be a key level.
The probability had been just 33 percent a month ago and less than 40 percent as of late last week.
The CME computes the probability of a rate hike by taking the end-month futures contract, subtracting the level at the beginning of the month, and dividing that by 25 basis points, which is the assumed level of each rate hike. (A full explanation of the process is here. The fed funds contracts are here. To get the implied funds level for each month, subtract the contract level from 100.)
FOMC members themselves, in their latest forecast in March, still indicated three increases in the funds rate this year. However, with increasing signs of inflation picking up and as the market begins to price in more hikes, the committee could begin to set its sights higher.
Link to the source of information: www.cnbc.com
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