Skip to main content

Probability of Fed Rate Hike is 90.53%

Our model of Federal Reserve policy estimates the probability that the Federal Reserve will increase interest rates. Our July 3rd Summary shows that the probability of the US Federal Reserve increasing the federal funds rate is 90.53%.

While our model needs to be adjusted, as noted below, we remain confident in these results.

The first forecast adjustment element are the previous hikes. Recall that in March, 2018, our model predicted a rate increase with a 92.3% probability. The rate increase following the June 12 – 13 FOMC meeting decreases the probability of subsequent rate increases, if only slightly (90.53% vs 92.30%). One precedent for the Fed raising rates in this manner came in 1994, during the Clinton Administration, when the Fed raised rates from February to May at a 25 basis point pace. Interest rates increased from 3.25% to 4.25% in 4 months (FED, 2018).

Each successive rate increase adds less to policy impact. Given that the Fed has  raised interest rates two times so far in 2018, the fact that the probability has fallen is consistent with our thinking.

The second forecast adjustment concerns inflation. Both Core PCE and CPI continued increasing in June and are now thought to represent a trend. Core PCE references living expenditures excluding food and energy. Yes, the impact on inflation of a trade war must be considered, also. The current Administration has initiated several tariff increases against China, Canada, Europe, NAFTA partners and others. A trade war makes it harder for the Federal Reserve to increase rates, since tariffs increase expectations concerning inflation by increasing prices for the purchased goods that are subject to a tariff. The Fed will want to be cautious about stoking runaway inflationary expectations. Indeed, the impact of the previous interest rate hikes and the looming trade war caused the Dow Jones Industrial Index to fall from 25320.73 on June 12th to 24174.82 on July 3rd. Uncertainty concerning trade will definitely have unpleasant impacts on industrial production, even with minor buffer policies, like allowing ZTE is resuming activities temporarily (Jenny Leonard, 2018).

In summary, the Fed will consider the impact on inflation of a trade war and might continue increasing interest rates but at a slower pace if the situation worsens.

Consumers are the third forecast adjustment factor. Our model uses two major indicators of consumer expectations: Consumer Sentiment, which indicates the confidence consumers have in the economy, and inflation expectations -consumer expectations concerning changes in the prices of goods. The Fed may wish to stop increasing rates in order to give consumer confidence time to adjust.

Given these factors, our adjusted probability of a Fed rate hike is lower than the unadjusted 90.53% probability. The next Fed Interest Rate Decision will be made public on Aug 01, 2018 02:00PM ET.

Research by Ryan Brand, Rongbin Ye, Impact Investing Analysts. EDITED BY WILLIAM MICHAEL CUNNINGHAM

References

Bloomberg Database. (2018). Dow Jones Industrial index & Yield Curve & Interest rate expectation. Retrieved from Bloomberg Terminal.  

Federal Reserve Database. (2018). FED Economic Data. Retrieved on July 3rd from: https://fred.stlouisfed.org

Popular posts from this blog

Maternal Health Financing Facility for Black Women: A Solution to an Urgent Problem

Maternal mortality is a significant issue in the United States, with Black women disproportionately affected. Research conducted by the Centers for Disease Control and Prevention (CDC) has shown that Black women are more likely to die from pregnancy-related causes than their white counterparts. However, the issue is not new, and despite the increasing amount of data available, the disparities have remained unaddressed for far too long.  Creative Investment Research (CIR) is among the organizations that believe there is a solution to the problem. Through our proposed impact investing vehicle , the Maternal Health Financing Facility for Black Women (MHFFBW), we aim to tackle the mortality gap and support Black women during childbirth, which will, in turn, benefit their communities. The Facility, based on legally binding financing agreements containing terms and conditions that direct resources to individuals and institutions capable of addressing supply-side conditions at the heart of

Projected Impact of Gun Laws on Corporate Profits in Texas

More Fortune 500 companies are located in Texas than in any other state. Texas successfully used low taxes and minimal regulations as bait to recruit companies like Tesla and Oracle. The state promoted these “advantages” in ads highlighting their “free-market” environment and criticizing the "tax and spend policies of liberal leadership" in Democrat-run states. Four million people migrated to Texas over the past ten years. Our economic models predict a reversal, however. State of Texas corporations on the Fortune 1000 list generate $2.2 trillion in revenue, $158 billion in profit. They have a market value of $3.8 trillion and employ 2.5 million people nationwide. We continue to believe this increased corporate presence in Texas imposes a tax on the nation as a whole. Texas allows anyone 21 or older to carry handguns without training or licenses, and maintains lower gun purchase age limits. Beyond the recent abortion bill, which allows people to sue those who "aid and abe

BRICS Summit 2023: Navigating the Transformation of Global Finance

Recent developments in the global financial landscape have captured the attention of the finance world, promising a new era of integration, transformation, and collaboration. Amidst the excitement, however, it is essential to acknowledge the formidable obstacles that stand in the way of realizing these ambitions. The 2023 BRICS Summit , slated to convene amidst this shifting landscape, is poised to be a significant juncture that could have profound implications for the future of international finance. The resurgence of Bitcoin, marked by an impressive, if smaller, year-to-date price surge, has underscored its enduring relevance. Similar concerns surround the exploration of central bank digital currencies (CBDCs). The UK's digital pound initiative, while forward-looking, raises questions about stability, security, and privacy and potential economic power imbalances. The notion of a BRICS digital currency, potentially extended to include several countries, reflects a desire to chall