Pondering The Stunning Growth In Rate Hike Bets And Predictions

Chart CME Fedwatch, annotations by Mish

Every day the CME Fedwatch posts rate hike odds based on trader positioning in Fed funds futures.            

The blue numbers represent the number of quarter-point hikes the market thinks is coming by the conclusion of the December 14 Federal Open Market Committee (FOMC) meeting. 

December 14 FOMC Meeting Probabilities

Rate hike probabilities from CME, annotations by Mish.

Cumulative Sum of Rate Hike Probabilities 

• 0: 0 Percent
• 1: 0.1 Percent
• 2: 2.2 Percent
• 3: 13.1 Percent
• 4: 39.4 Percent
• 5: 72.2% Percent
• 6: 93.3 Percent
• 7: 99.4 Percent
• 8: 99.9 Percent 

Market participants are pricing in between 4 and 5 hikes with 5 hikes more likely than 4. 

FOMC Meeting Dates 

1. March 16
2. May 4
3. June 15
4. July 27
5. September 21
6. November 2
7. December 14

Fed Projections as of December 15, 2021

Dot Plot of FOMC participant expectations, chart by the Fed, yellow and red annotations by Mish.

The Fed normally provides projections at the end of two-day meetings. It failed to do so in January so that dot plot is a bit stale. 

Analyst Projections

Fed calls this week

• JP Morgan (Fri): 5 hikes this year (Mar, May), 3 next year
• BofA (Fri): 7 this year (every meeting), 4 next year
• Morgan Stanley (Thurs): 4 this year (Mar, Jun)
• Deutsche Bank (Wed): 5 this year (Mar, May, Jun), 3 next year

All hikes are ¼ pt

— Nick Timiraos (@NickTimiraos) January 28, 2022

Fed calls this week

• BNPP (Thurs): Six hikes this year, three next year
• Standard Chartered (Fri): Four this year (at the next four meetings), two next year
• Wells Fargo (Fri): Five this year (Mar, May, Jun), three next year

All hikes are ¼ pt

— Nick Timiraos (@NickTimiraos) January 28, 2022

Anyone who believes they hike so far they create an inverted yield curve is not playing with a full deck. The spread today would allow 2 hikes, that’s it. This narrative will change rapidly at some point soon.

— Brian Thede (@Sailorbt) January 29, 2022

Projection Synopsis

• Bank of America amazingly projects 7 hikes, one at every meeting in 2022 plus 4 more in 2023. That would put the Fed Funds Rate at 2.75% to 3.00% at the end of 2023.
• BNPP projects 6 this year and 3 more in 2023. That would put the Fed Funds Rate at 2.25% to 2.50% at the end of 2023.
• Deutsche Bank and Wells Fargo project 5 this year and 3 more in 2023. That would put the Fed Funds Rate at 2.0% to 2.25% at the end of 2023.
• Barclays and UBS project 3 this year with no forecast for 2023.

Seriously Delusional

The projections by Bank of America and BNPP are seriously delusional. 

I side with Brian Thede who says "Anyone who believes they hike so far they create an inverted yield curve is not playing with a full deck. The spread today would allow 2 hikes, that’s it. This narrative will change rapidly at some point soon."

Note that the serious delusion (or purposeful lies) by Fed participants. Three hikes? OK, perhaps. Nine hikes is fantasyland material. 

Bank of America, BNPP, and the Fed are all in an alternate fantasyland universe.

Recession When?

After three hikes, the yield curve will at best be totally flat but more likely somewhat to seriously inverted and predicting recession.  

With Nearly Everyone Looking the Other Way, It's Time to Discuss Recession

GDPNow Initial Forecast for 2022 Q1, Chart by Atlanta Fed, Chart Comments by Mish

Recession Call

1. The Fed is hiking

2. Stimulus has worn out

3, The stock market is stumbling

4. Pending Homes Sales Unexpectedly Decline 3.8% in December

5. Merchants are stockpiling and pre-ordering everything

6. Retail sales are falling

— Mike "Mish" Shedlock (@MishGEA) January 28, 2022

I am sure I missed more ideas but added points 7 and 8:

7. Major deceleration in deficit spending.

8. Declining working age population will reduce productivity.

Several people asked about my conclusion "I now expect a recession no later than the end of 2023," wondering if I meant 2022.

I am frequently early in my recession calls, but 2022 is entirely possible. Either way, few are looking in that direction. 

And I am positive the Fed will not keep hiking if the economy weakens or the curve significantly inverts.