69.7%. This is the probability, as given by the CME “FedWatch” on September 24, that the Fed will raise rates by 25 basis points at the October policy meeting. The current target range for the federal funds rate is 3.75%–4.00%. Translated into plain terms, the market sees “one more hike” as nearly the default option, with the probability of holding rates steady down to just 30.3%.
First, make sure you understand how this number is derived—otherwise it’s easy to get led around by it. It comes from the implied pricing of interest-rate futures: consensus staked by a group of traders using real money, not a statement from the Fed. And it moves every day. Just a few days ago, this probability was still around 50%. The batch of data released on September 23 was the trigger: the composite PMI initial reading of 58.4, Brent crude oil returning to $100, and weak demand at the 5-year Treasury auction—pushing the probability to nearly seventy percent.
What should ordinary users pay attention to? I think it’s the following three things, not the news item itself.
First, don’t treat probability as fact. A 69.7% figure still implies roughly a 30% chance that the Fed will do nothing in October, while the market is pricing as if “a hike is certain.” That kind of one-way pricing is exactly what a position is most vulnerable to being blown up by a contrary data release.
Second, watch the bond market—don’t only listen to speeches. In this rise of long-end yields, the contribution from real rates is clearly greater than that from inflation compensation. In other words, the market is repricing “fiscal supply” and “real returns.” This isn’t something that will change direction because of a single meeting.
Third, lay out your scenarios first. An October hike followed by post-meeting remarks suggesting the job is already done is entirely different from a hike followed by continued emphasis that more hikes will come. Does your current positioning assume one of these outcomes—and does it leave you any room to get out if you’re wrong?
So, how would you judge the timing of the final rate hike in this cycle—will it land in October or December?
#Fed October Rate-Hike Probability Rises to 69.7%
First, make sure you understand how this number is derived—otherwise it’s easy to get led around by it. It comes from the implied pricing of interest-rate futures: consensus staked by a group of traders using real money, not a statement from the Fed. And it moves every day. Just a few days ago, this probability was still around 50%. The batch of data released on September 23 was the trigger: the composite PMI initial reading of 58.4, Brent crude oil returning to $100, and weak demand at the 5-year Treasury auction—pushing the probability to nearly seventy percent.
What should ordinary users pay attention to? I think it’s the following three things, not the news item itself.
First, don’t treat probability as fact. A 69.7% figure still implies roughly a 30% chance that the Fed will do nothing in October, while the market is pricing as if “a hike is certain.” That kind of one-way pricing is exactly what a position is most vulnerable to being blown up by a contrary data release.
Second, watch the bond market—don’t only listen to speeches. In this rise of long-end yields, the contribution from real rates is clearly greater than that from inflation compensation. In other words, the market is repricing “fiscal supply” and “real returns.” This isn’t something that will change direction because of a single meeting.
Third, lay out your scenarios first. An October hike followed by post-meeting remarks suggesting the job is already done is entirely different from a hike followed by continued emphasis that more hikes will come. Does your current positioning assume one of these outcomes—and does it leave you any room to get out if you’re wrong?
So, how would you judge the timing of the final rate hike in this cycle—will it land in October or December?
#Fed October Rate-Hike Probability Rises to 69.7%