Today's Likely Fed Funds Rate Hike Won't be the Last One for a While

One would think that as the decision-date (which is today) for the Federal Reserve's next hike in the Fed Funds rate approached, the near certainty of it being ratcheted higher be evidenced by more literal bets to that end. That's not the way it's panned out, however. Amazingly enough, based on the futures for the Fed Funds rate, traders are saying the odds of a rate hike today have actually slimmed over the past couple of weeks.

Don't misunderstand. The majority of futures positions still say the market is decidedly betting on a rate increase today... 91% of the market is looking for it to happen. That's down slightly from the previous check-in though. That scale-back may simply be the result of a rapid rush to make the bet late last month, with those traders subsequently overshooting the target just a bit.

Whatever the case, while the market has pared back slightly on its expectations for a rate hike today, the real story is that traders have also slightly pared back on their rate-hike expectations for the coming year.

Again, don't misunderstand. The odds have long favored in increase near the end of this year and one more -- and only one more -- next year, and still do. Now the odds of just one increase in 2017 have grown though, all the way through the end of the year. The futures market is simply saying that as of November of 2017, there's a 39% chance we'll have only seen two rate bumps in the meantime, with only a modest 26% chance of three hikes, yet a similar 23% chance that today's hike will be the only one we'll see until at least the very end of 2017.

In some regards it could actually be interpreted as a bit alarming. With the pro-business President-elect about to take office in a little over a month and the 8% rally the market's dished out since Donald Trump's election, one would think traders were expecting economic strength that suggests more rate hikes would be an outright necessity in 2017. As they say though, numbers don't lie - the market doesn't anticipate enough economic robustness to really drive inflation, even if the rhetoric suggests otherwise.

Of course,  a year is a long time. There will be plenty of time and opportunity to up the odds of a rate hike between now and then. There's no significant need to make such a bet now.

Still, given all the chatter, one would have expected to see a little more economic optimism packed into interest rate predictions.

To that end, while the interest rate futures market is telling one story, the analyst-prediction market is telling a slightly different one. The pros are collectively expecting (via a survey of them -- expectations that don't cost anything if they're wrong ) the Federal Reserve's foundational interest rate to rise much more in 2017 than the futures say they will. Namely, the consensus estimate for the end of 2017 says the Fed Funds rate will be between 1.0% and 1.25%, versus the futures market's prediction for a rate of between 0.75% and 1.0% by then.  [Note, however, the Fed's base rate isn't expected to get there until the fourth quarter... not before.]

Realistically, if this story unfolds the way most do, the reality will likely be somewhere in between the two prevailing opinions. That puts the Fed Funds rate at 1.0% by the end of 2017. That journey, however, is almost universally expected to begin today.