Plotting the Fed's Baby Step 1/8 Point Hikes; Yellen vs. Greenspan "Measured Pace"

The market still believes the Fed will hike rates in September or October. The CME's FedWatch Sees it like this.



That table is based on Fed Fund Futures and option bets. I highly doubt the Fed will think about a half-point hike no matter how strong the economic data between now and the September 16-17 meeting.

Fed Funds Futures expire on the last day of the month but settle at the average rate for 30 days prior.

Using Fed Funds Futures (not options) from August 18, I generated the chart and table below.

Implied Fed Funds Rate 2015-08-18



click on any chart for sharper image

Comments

• Rate hikes will not be that smooth. For starters, meetings are 8 times a year, not 12.
• The current Fed Funds Rate as of August 18, 2015 is 0.138 percent. 
• The implied rate for September is only 0.185 percent (but that is a 30-day average).
• The implied rate does not hit 0.25 percent until October. That would roughly be a 1/8 point hike from the current rate of 0.138 percent.
• The next 1/8 point hike would not occur until December or January at the earliest.

Let's assume the Fed actually does get a hike off in September if for no other reason than the market expects such a hike.

Based on Fed Fund Futures and FOMC Meeting Dates, and taking into account 30-day averages, the table of future rate hikes looks something like this.

Rate Hike Dates and Amounts

Month	Fed Funds Future	Implied Fed Funds Rate	Meeting Date	Market Expectation
Aug-15	99.863	0.138
Sep-15	99.815	0.185	16-17	0.250
Oct-15	99.755	0.245	27-28
Nov-15	99.730	0.270
Dec-15	99.675	0.325	15-16	0.375
Jan-16	99.625	0.375	26-27
Feb-16	99.585	0.415
Mar-16	99.535	0.465	15-16	0.500
Apr-16	99.475	0.525	26-27
May-16	99.430	0.570
Jun-16	99.375	0.625	14-15	0.625
Jul-16	99.315	0.685	26-17
Aug-16	99.255	0.745
Sep-16	99.220	0.780	20-21	0.750
Oct-16	99.155	0.845
Nov-16	99.075	0.925	01-02	0.875
Dec-16	99.010	0.990	13-14	1.000
Jan-17	98.970	1.030	31-01
Feb-17	98.885	1.115
Mar-17	98.850	1.150		1.125
Apr-17	98.795	1.205		1.250
May-17	98.730	1.270
Jun-17	98.700	1.300
Jul-17	98.655	1.345		1.375
Aug-17	98.600	1.400
Sep-17	98.560	1.440
Oct-17	98.520	1.480		1.5
Nov-17	98.470	1.530
Dec-17	98.430	1.570

Fed Funds Futures strongly suggest the Fed will move to 1/8 point hikes, down from current moves of 1/4 point or more, and widely spaced at that.

Taking into account FOMC meeting dates, I created the following chart.

Fed Interest Rate Hikes and Dates (Implied from Futures)



Yellen vs. Greenspan

1. The above market expectations are clearly similar to Greenspan's famous statement: Hikes will be at a "pace that's likely to be measured".
2. The Yellen expected "pace" is half as often.
3. The Yellen expected "measure" is half as much.

Measured Pace Revisited

Inquiring minds may wish to investigate my November 6, 2007 commentary on Greenspan's "measured pace", well ahead of the crisis: Greenspan on Housing, Central Bank, Gold.

Even at the above half-pace, half-measure set of market expectations, I suggest we will not see many of those hikes.

Instead, I propose the Fed delayed hikes so long, that an interim recession will gum up the works leaving the Fed no room to cut.

My recession warning still stands.

Mike "Mish" Shedlock