Fed Funds Futures Pricing In A Pause In Rate Hikes For 2019

The Federal Reserve’s recent run of raising interest rates is expected to hit a wall in 2019, according to Fed funds futures. After four rate hikes in 2018 and nine since the current cycle of tightening began in 2015, the crowd is currently anticipating that policy will remain on hold for the rest of the year, according to CME data.

The Fed funds futures market this morning is pricing no change for the target rate – currently set at a 2.25%-to-2.50% range – for the remainder of 2019. The implied probability for keeping the target rate steady at the Jan. 30 policy meeting is currently 99.5%. The probability for no change slides in the months ahead, but even by the Dec. 11 Federal Open Market Committee (FOMC) meeting the crowd is estimating a 67% probability that the Fed will continue to maintain the current target rate.


Predicting monetary policy is prone to error, of course, but it’s striking that the market’s outlook is consistent for anticipating no change in the Fed funds rate for the rest of the year. The obvious caveats apply, of course, starting with the possibility that incoming economic data could change the market’s expectations. But for now, the view that the Fed’s tightening is on pause until further notice dominates market sentiment.

Support for a no-change forecast can be found in other markets. One example: the implied inflation forecast via the spread on nominal Treasury yields less the inflation-indexed counterparts. For instance, consider the 5-year Treasury maturities: the market’s estimate of future inflation has fallen sharply in recent months, easing to less than 1.7% as of yesterday’s close (Jan. 8) from more than 2.0% in October.


Meanwhile, the Treasury yield spread has narrowed dramatically, which also implies that the odds are lower for additional rate hikes. The 10-year/2-year spread as well as the 10-year/3-month spread are just slightly above zero, reflecting a sharp slide over the past year.

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