Rate hike probability
The Fed will announce its interest rate decision on Wednesday, March 15, 2017. Investors around the world are eagerly waiting for the announcement, and global markets (ACWI) (VTI) are mixed ahead of the Fed’s decision.
Fed chair Janet Yellen recently said at the Executives’ Club of Chicago that the economy is showing strength. The Fed is sounding more hawkish in regards to a March rate hike. After Yellen’s speech, market participants believed the probability of a rate hike had risen. According to the CME Group FedWatch Tool, the probability of a rate hike (75-100 basis points) rose to 95.2% from 40% in the last week.
Increasing rate hike probability
The CME Group FedWatch Tool uses the 30-day Fed fund future price. This metric is generally used to track market views on the possibility of a change in monetary policy. The increasing probability indicates that the Fed might move at a faster pace in 2017.
A gradual rate hike process is appropriate when the economy (SPY) (QQQ) (IVV) is showing strength. Various economic indicators such as consumer sentiment, manufacturing PMI, services PMI, and business sentiment are improving. These factors are changing investors’ view on the economy.
In the next part of this series, we’ll analyze how interest rate movement will impact bond prices.