On December 14, right before the FOMC decision I took a snapshot of rate hike odds and posted them in Fed Hikes Today, Then What?

Today, we compare the before vs. the after, the latter is from Friday, December 16.

Following that comparison, I present my reasons why all the expected hikes are not coming.

March 2017 Rate Hike Odds Before


June 2017 Rate Hike Odds Before


September 2017 Rate Hike Odds Before


March 2017 Rate Hike Odds After


June 2017 Rate Hike Odds After


September 2017 Rate Hike Odds After


Market Expectations Before and After Synopsis

  1. March: The market did not expect a hike at the March meeting either before or after the FOMC Meeting. Nonetheless, the odds of March hike rose from 15.8% to 25.3%.
  2. June: The odds of at least one hike by June rose from 54% to 75.3%. Odds of two or more hikes rose from 11.5% to 24.9%
  3. September: The odds of at least one hike by September rose from 70.2% to 89.1%. Odds of two or more hikes rose from 28.5% to 55.5%. Odds of three or more hikes rose from 6.2% to 20.2%.

This is a much more aggressive assessment that before the FOMC meeting.

Mish Expectation

I have been betting against rate hike consensus opinion for years. The Fed managed to get in one hike in each of the last two years, both in December, vs. Fed assessments of 3-4 hikes each year.

For the third straight year, rate hike expectations for the coming year soared in December, only to quickly die at the beginning of the next year. Expect more of the same.

Five Reasons Fed Won’t Hike Twice in 2017

  1. Housing looks weak, and mortgage rates have soared. See Housing Starts Dive 18.7 Percent: Mortgage Rates Soar.
  2. The New York Fed assessment is 4th Quarter GDP will be 1.8%. If so, 2016 GDP will be on the order of 1.6%. Three hikes? Really? See Nowcast, GDPNow Diverge Widely Again: What Happened?
  3. The strengthening US dollar is hurting exports. See Trade Deficit Widens, Exports Decline 1.8%, Imports Rise 1.3%: Two Piece Puzzle
  4. Trump’s policies risk a major trade war. My baseline scenario is Global Trade War Baked in the Cake: Boeing Faces China’s Wrath. Also note China Tells Trump “Nothing to Discuss” If US Drops “One China” Policy.
  5. Retail sales weakened, led by autos. Retail Sales Unexpectedly Dive: Spotlight on Cars and the “Amazon Effect”

Bonus Reason

If you are looking for a bonus reason, consider interest on the national debt: Rate Hike Spotlight: Interest on National Debt; What Can Possibly Go Wrong?

It would not surprise me in the least if the Fed did not hike at all. It would not even surprise me if the next move was a cut.

Mike “Mish” Shedlock