The Chicago Mercantile Exchange (CME) provides a continuously updated look into the implied probability of policy changes from the Federal Reserve, specifically in regards to the Federal Funds rate. This is the interest rate set by the Federal Reserve, which then provides the range that banks are allowed to lend money to one another, most typically for an overnight length of time. Today, the Federal Funds rate is targeted to be between 1.25% and 1.50%. With fifteen days to go until the next Federal Reserve Open Market Committee (FOMC) meeting, the CME tool is saying the implied probability of a rate hike at this next meeting is 83%. If proven correct, the Federal Funds rate will be between 1.50% and 1.75%.
Here are some predictions from the CME tool further into 2018:
- June 13, 2018: 69% chance of another rate hike into the 1.75% and 2.00% range
- Sept. 26, 2018: 45% chance of a further rate hike into the 2.00% and 2.25% range
- Dec. 19, 2018: a 26% chance of the third rate hike into the 2.25% and 2.50% range
The FOMC provides for public viewing each committee member’s assessment of the appropriate level of Federal Funds rate. This “Dot-Plot” suggests the median expectations for Federal Funds rate are as follows:
- 2018: 2.25%
- 2019: 2.75%
- 2020: 3.13%
- Longer Run: 2.75 to 3.00%
As all the above information is readily available, it is highly likely that most market participants have already adjusted their expectations for the major asset classes. In other words, the information above is likely priced in. What will be interesting is whether any future words from the Federal Reserve provides more fuel for the market to be spooked. After the last FOMC meeting, one of the additional words that sparked a decline in the major asset classes was the word “further.” This single word cannot take all the credit, but it did get much of the media attention. The markets like stability and a sense of being able to see what is in the future. Words like “further” do not provide such clarity, but instead raise fears.
However, during times of fear silver linings can be found. Low interest rates may have helped to fuel our economy back to strength and asset prices to rise; but, low rates also hinder those who are living on a fixed income. The long-term benefit of rising interest rates is that our retiring population can feel some ease in knowing that the dollars they have will provide for a higher level of income. This reality is already being reflected in the fixed income market with higher money market yields and a re-setting of credit rates across stable value funds and annuities.
Furthermore, the dust always settles after market storms. And it won’t only be fixed income securities that will be providing for higher yields; market participants will also see a rise in expected returns for all other major asset classes as well.
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