In the wake of an allegedly “welcome” increase in inflation, the market is starting to price in increasing odds of rate hikes – not many, and not fast, but there are very noticeable changes.

The Fed starts a two-day meeting tomorrow. Its interest rate decision comes Wednesday. Despite the talk of a hike tomorrow, the Fed would never surprise with hikes.

March 16 Meeting Odds

Fedwatch 2016-03-14A

Other than the 96% chance of the Fed doing nothing, there is nearly a 4% chance of a cut. A cut won’t happen.

June 15 Meeting Odds

Fedwatch 2016-03-14B

By June, the odds of a rate hike are nearly 50%. Moreover, the odds of two hikes are 8.2% vs. the odds of a cut of 1.9%.

A month ago, the odds of no hike were 81.5%. All in all, this is quite a change.

December 21 Meeting Odds

Fedwatch 2016-03-14C

Heading all the way out to late December, the odds of at most one hike are still a very high 64.2%. There is even a 0.9% chance of a cut.

However, there are significant chances (35.7%) of multiple hikes. Of the multiple hikes, the most likely is two. The odds of two hikes by December are 25.6%.

These numbers may change significantly based on what the Fed says on Wednesday. Given the rise in the stock market, the Fed is more likely to be on the hawkish side, as it stands now.

However, on Wednesday morning, CPI, housing starts, and industrial production numbers come out.

If those numbers are weak, the Fed will not be so hawkish. If the numbers are bad enough, the Fed will be anything but hawkish.

Mike “Mish” Shedlock