Thursday, May 29, 2008

Rate-hike odds up

The market has now completely ruled out any chance at a rate cut, with the possibility of a hike now beginning to creep into the pricing of fed funds futures contracts. No hike is priced in for the June 25 and Aug. 5 FOMC meetings. For the Sept. 26 FOMC meeting, the market is priced for 28% odds of a 25-basis-point hike.

For the end of 2008, the market is priced for 100% odds of a 25-basis-point hike and for 20% odds of 50 basis points in cumulative hikes. By the end of the first quarter of 2009, the market expects that the funds rate will be 2.69%, up from 2.00% currently.

I do not believe that an interest rate hike will occur this year, as the Federal Reserve is unlikely to feel that economic growth has become self-sustaining by then. It normally takes at least six months before such conditions begin to set in, and the economy has not shown any meaningful sign of recovery yet.

No comments: