Rate Hike Probability: To Hike Or Not To Hike By Emad A. Zikry
The article explains how investors can use information from futures markets to gain insights into market expectations regarding interest rates' future direction. The CME Group's FedWatch Tool calculates the probability of a future Rate Hike event occurring. It uses detailed data regarding Fed Funds futures market participants' behavior. The tool assigns probabilities, derived from market expectations, to the Federal Open Market Committee (FOMC) policy rate. The implied probabilities associated with each possible rate in September show that the market expects a Fed Funds Hike by the end of December or perhaps sooner. In conclusion, information from futures markets can be valuable in determining market expectations of interest rates and other macroeconomic variables. Emad A. Zikry is the President and CEO of Vanderbilt Avenue Asset Management LLC, an investment management firm in New York. Emad A. Zikr has a distinguished record of professional achievements. This includes numerous articles published in professional and academic journals such as The Journal of Forecasting, The American Economist, and the Journal of Fixed Income.
The article explains how investors can use information from futures markets to gain insights into market expectations regarding interest rates' future direction. The CME Group's FedWatch Tool calculates the probability of a future Rate Hike event occurring. It uses detailed data regarding Fed Funds futures market participants' behavior. The tool assigns probabilities, derived from market expectations, to the Federal Open Market Committee (FOMC) policy rate. The implied probabilities associated with each possible rate in September show that the market expects a Fed Funds Hike by the end of December or perhaps sooner. In conclusion, information from futures markets can be valuable in determining market expectations of interest rates and other macroeconomic variables.
Emad A. Zikry is the President and CEO of Vanderbilt Avenue Asset Management LLC, an investment management firm in New York. Emad A. Zikr has a distinguished record of professional achievements. This includes numerous articles published in professional and academic journals such as The Journal of Forecasting, The American Economist, and the Journal of Fixed Income.
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Figure 1
Probability
55.0%
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Probability of Fed Funds rate by September
23.06%
48.73%
26.22%
1.99%
0% 0.25% 0.50% 0.75% 1.00%
Fed Funds Target Rate
Probability of rate hike =
28.21% = 26.22% +1.99% +
0%
0%
Probability
Source: CME Group FedWatch as of 6/16/2015
Table 2 below shows the cumulative probabilities of a rate hike for each month that coincides with a
FOMC meeting until December 2015.
Table 2 Cumulative Probabilities of a Rate Hike
FOMC Meeting Dates 2015 CME Group Implied Probability
of Rate Hike (as of 6/16/2015)
Jul 28-29 5%
Sep 16-17 28%
Oct 27-28 48%
Dec 15-16 65%
Source: CME Group FedWatch as of 6/16/2015
The data above shows the implied probability of an interest rate increase after each upcoming FOMC
policy meeting. As the table demonstrates, the market expects a Fed Funds hike by the end of December
or perhaps sooner.
In sum, information from futures markets can be very useful in determining the market’s expectation of
the direction of interest rates and other macroeconomic variables.
Elias Scheker
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