Fed Members Talk Up Flexibility On Interest Rates; Odds Of An Increase Rise From 0%

In the last few days the heads of the Chicago, Boston, Atlanta, St.Louis, Dallas, and Cleveland Federal Reserve Banks have all said that the Federal Reserve will be patient on any interest rate increases in 2019 with even the most hawkish officials, such as Boston’s Eric Rosengren, saying the Fed should be “flexible and patient.”

And yet, the CME FedWatch tool, which calculates the odds of a Fed move by looking at the prices in the Fed Funds Futures market, is showing an increase in the odds of an interest rate increase in the first half of 2019.

Partly that’s a reflection of the extremely low odds of an interest rate increase at the end of last week. The market was pricing in 0% chance of a rate increase at the March 20, May 1, and June 19 meetings. Today the odds of an interest rate increase at the March 20 meeting are up to a still very low 10.9%. Odds for a May 1 move higher are now 16.2%. The June 19 odds for an increase have climbed to 24.6%.

All those numbers are still so low that they’re equivalent to No chance of a rate increase.

But the past few days have moved the odds off 0% in recognition that the market have over-reacted.

The Fed officials who have spoken, while advocating patience, have also noted that the market is too pessimistic about the economy. Recent data on consumer spending and credit show no signs of the kind of retreat that would be necessary to create the conditions for a recession in spite of recent Wall Street talk of a recession in 2020.

Today sees the release of minutes from the Fed’s December meeting. That’s likely to move the financial markets.

My best estimate now is that the odds of a rate increase will continue to rise over the next couple of weeks until they reach the vicinity of 30% to 40%. That’s well short of the 65% or so conviction rate that the Fed likes to create before making a move on interest rates.

Check to see if the odds stabilize at that 30%-40% level.