The Fed has communicated that the plan for 2017 includes three rate hikes. The market isn’t quite buying into that plan yet. According to Bloomberg’s WIRP function, the first meeting with over a 50% chance of a rate hike isn’t until the June FOMC meeting (73% probability of a hike). If the market is correct, then that would mean we would have to see two more additional hikes in the second half of 2017. The last time we had three hikes in a six month period was in 2006. According to Dec 17 fed funds futures, the market does believe that the Fed will come through with two hikes next year, however. The current implied fed funds futures rate for December 17 is 116 bps. It would seem that the economy would have to be much stronger than it is now for the Fed to feel confident raising rates three times in the back half of 2017. If we don’t get the first hike until June, then it seems likely that two hikes is the most we will see in 2017.
Article by Eric Bush, CFA – Gavekal Capital Blog
