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US Interest Rate, rate Hike, Matter, When, not If, Fundamental Analysis, fx trader, forex, US Inflation

When will we see interest rates rise?

Below is a list of upcoming Fed rate meetings this year and their associated rate hike probability as per CME Group Interest Rate Contracts. The numbers show the probability of any rate increase at that particular meeting, not necessarily the first rate hike; it includes the probability of subsequent rate hikes.

July 29: 0%

September 17: 17%

October 29: 34%

December 16: 57%

January 27: 72%

The recent FOMC statement was upbeat and signaled that the Fed recognises the increase in economic activity since the first quarter. They noted a decrease in labour market slack and an expansion in the economy. However their projections for the Fed Funds Rate for the end of 2016 and 2017 were lowered, along with growth forecasts for those periods.

This saw the dollar sold off aggressively, however it does little to change to fundamental picture. Any forecast for a period of the time that is 18 or 30 months into the future is going to be a loose estimate at best. It will be the inflation data over coming months – for both prices and wages – that provides the most accurate estimate of the futures rate path. Yellen reiterated repeatedly at the press conference on June 17 that the Fed has not made any decisions on when to raise rates and that they remain data dependent.

If Fed members themselves have not yet decided when they will raise rates then we must look to the data. If upcoming data continues to trend higher, this may cause some individual Fed members to consider a rate increase at the September meeting, despite the market currently pricing only a 17% chance of it. In essence, all US-related data released over the coming weeks is vitally important to inform the market about when the first rate hike will occur.

 

Jarratt Davis
FX trader, Funds Manager and Mentor
Author of
How to Trade a Currency Fund

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