Hike Odds Down Again

Three major newspapers contained articles this week apparently signaling the Federal Reserve's discontent with expectations for both the nearness of rate hikes and the magnitude of future hikes. Two of the articles appeared on Tuesday -- in the Financial Times and in the Wall Street Journal, and the other on Monday, in the Washington Post. Since then, rate-hike odds have fallen, helped by weakness in the equity market, and in particular, shares in financial companies, especially regional banks.

For next week's FOMC meeting, the market is priced for 10% odds of a 25-basis-point hike, down from 16% odds on Tuesday and 22% odds on Friday.

For the Aug. 5 FOMC meeting, the market is priced for 48% odds of a cumulative 25 basis points in hikes, down from 58% odds Tuesday and 83% odds on Friday.

For the Sept. 16 FOMC meeting, the market is priced for 100% odds of a cumulative 25 basis points in hikes and 28% odds of a cumulative 50 basis points in hikes, down from 48% odds Tuesday and nearly 100% odds on Friday.

For the end of 2008, the market is priced for a funds rate of 2.67%, down from 2.74% Tuesday and 2.86% on Friday. In other words, the market has shaved nearly one 25-basis-point rate hike from end-of-year expectations.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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