Is It Finally Going to Happen Next Week?

December 11, 2015 | Christopher Caparelli, CFA, Partner

In testimony before the House Financial Services Committee on November 4, Federal Reserve Chairwoman Janet Yellen remarked that a rate hike was still a “live possibility” in December, should economic data remain supportive. Prior to that comment, the market was unsure of any policy change at the Fed’s December meeting, with the Fed Fund’s Futures market implying a  50% probability of a rake hike. After Yellen’s comments, the probability of a hike in December jumped to nearly 70%, and currently sits at 80%, thanks to strong payroll reports over the last two months and further hawkish comments from FOMC members.

Despite this guesswork, Yellen and other members of the FOMC have stressed that the timing of the first rate hike in over nine years is less important that the pace of successive increases. While the futures market hasn’t been an overly reliable predictor of the future path of the Fed Funds rate, it is worth noting that the market appears to accept the Fed’s pledge to enact future increases in a slow and steady manner. Assuming a 0.25% increase on December 16 as a near certainty, the futures market doesn’t imply any meaningful probability of the next increase until the March 2016 meeting, with the most likely landing spot of the Fed Funds rate to be between 0.75% and 1.00% at the end of 2016. While a Fed Funds rate of 1.00% would be a notable shift from the Fed’s post-crisis zero interest rate policy, it would still be seen as highly accommodative in a historical context, and supportive of future economic growth.