Janet Yellen’s Jackson Hole speech raises odds of a rate hike in December

Market expects rate hike to materialize in December, which fits in well with the expectation the Fed won’t do anything before the presidential elections in November


December is still some time away, and the CME Group probabilities show the probability of a second hike by next July is very low—both of which will be a source of comfort for the markets. Photo: Bloomberg
December is still some time away, and the CME Group probabilities show the probability of a second hike by next July is very low—both of which will be a source of comfort for the markets. Photo: Bloomberg

The reaction of the stock markets to Fed chair Janet Yellen’s much-awaited speech has been tepid, with the S&P 500 down by a mere 0.16%. The currency markets have been more emphatic, with the dollar index going up 0.8% last Friday. But it is the bond markets that have been the worst hit, with the yield on the two-year US government bond rising 6.8% and on the 10-year government bond going up 3.6%. That said, neither the dollar index nor the US Treasury yields are anywhere near the heights they were at earlier in the year.

The odds of a Fed rate hike have increased quite a bit, as seen from the accompanying chart by the CME group which calculates the market’s views on the changes of the US Fed’s policy rate at future FOMC meetings, based on CME Group 30-day Fed Funds futures prices.

While the probability of a rate hike in September has gone up, it’s still well below 50%. As the chart shows, the market expects the rate hike to materialize in December. That fits in well with the widespread expectation that the Fed will not do anything before the US presidential elections in November.

That seems to be borne out by the state of the US economy, as seen from the latest PMI (Purchasing Managers Index) data as well.

Commenting on the flash PMI for August for the US, Markit chief business economist Chris Williamson said, “Historical comparisons indicate that the PMI is signalling an annualized GDP (gross domestic product) growth rate of just under 1% in the third quarter, based on data for July and August. With job creation also waning alongside subdued price pressures...the survey data will fuel expectations the Fed will be in no rush to tighten policy again. However, as anecdotal evidence from the survey suggests that business activity is being dampened by uncertainty due to the coming presidential election, there’s a good chance the economy will pick up speed again after the vote, leaving a December rate hike on the table.”

But December is still some time away, and the CME probabilities show that the probability of a second hike by next July is very low. Both these factors will be a source of comfort for the markets.

More From Livemint