The market has priced in just about a zero percent change of an interest rate increase from the Federal Reserve in 2019. In fact, looking out through all of 2019 and into 2020, the financial markets believe there’s more chance of an interest rate cut than of a rate increase.
This kind of all in bet does raise the risk of a big move–and probably to the downside–if the market turns out to be wrong.
Here’s how the odds line up a day after a Federal Reserve meeting and a press conference by Fed chair Jerome Powell that Wall Street believes ruled out even one interest rate increase in 2019.
According to the CME FedWatch tool, which uses prices in the Fed Funds futures market to calculate the odds of a move by the Federal Reserve, investors and traders have almost completely discounted the idea of an interest rate increase at the March 20 meeting. Odds of a rate increase are just 1.3%. (The Fed doesn’t meet in February or April.)
Odds of an interest rate increase at the May 1 meeting are also just 1.3%. According to the Fed Funds future market, there’s actually better odds for a interest rate cut at the May meeting–2%–than for an interest rate increase.
At the June 19 meeting the odds of a rate increase climb all the may to 4.4% and for the July meeting the odds are 4.3%.
Go out even further in to 2019 and the odds of an interest rate increase don’t increase markedly. At the September 18 meeting the odds are also just 4.3% (with 5.3% odds of an interest rate cut.) At the October 30 and December 11 meetings the odds of an interest rate increase slip further to 4.1% and 3.6%, respectively, while the odds of an interest rate cut climb to 9.6% and 19.8%, respectively.
By the January 29 meeting odds of an interest rate increase is down to 3.1% and the odds of a rate cut have climbed to 29.7%.
At the very least, this consensus means that investors need to rethink their assumptions about bank stocks, income stocks in general, and bonds.