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.