Fed Fund Futures are Pricing in 67% Chance of Rate Hike in Aug and 97% Chance in Sept

June 12, 2008

Could the Federal Reserve Raise Interest Rates? You betcha.

At least that’s what futures traders are banking on:

According to the latest Fed fund futures, the market has already priced in a 67 percent chance of a 25bp rate hike in August and a 97 percent chance of a rate hike in September.

The following table shows that of 97 percent chance, there is a 51 percent chance that rates would be taken to 2.50%, which is a whopping 50bp rate hike!

JPMorgan Chase just updated their Fed call today to support a 25bp rate hike in September.

These are difficult times for the Federal Reserve who knows that even though recent economic data reinforces their plans to keep interest rates steady, economic growth could easily falter in the coming months as jobless claims jumped to the highest level since March while continuing claims reached their highest in 4 years.

However inflation and inflation expectations continue to rise. Although crude oil prices have retraced, they are still hovering near record highs while floods in the Midwest have driven corn prices to all time highs. There is little respite for food and gasoline prices which is why the market believes that despite the risks to growth, the Federal Reserve will have to raise interest rates and not just once.

Consumer prices are due for release tomorrow and this will confirm or deny the need for a rate hike. When growth is weak, making inflation a top focus could lead to even weaker economic conditions in the future.

Posted in Fed Rate Cut Expectations, Fed Rate Cut, Federal Reserve