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Pondering the Stunning Growth In Rate Hike Bets and Predictions

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19 comments on Pondering the Stunning Growth In Rate Hike Bets and Predictions

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Chart CME Fedwatch, annotations by Mish

Every day the CME Fedwatch posts rate hike odds based on trader positioning in Fed funds futures.            

The blue numbers represent the number of quarter-point hikes the market thinks is coming by the conclusion of the December 14 Federal Open Market Committee (FOMC) meeting. 

December 14 FOMC Meeting Probabilities

Rate hike probabilities from CME, annotations by Mish.

Cumulative Sum of Rate Hike Probabilities 

  • 0: 0 Percent
  • 1: 0.1 Percent
  • 2: 2.2 Percent
  • 3: 13.1 Percent
  • 4: 39.4 Percent
  • 5: 72.2% Percent
  • 6: 93.3 Percent
  • 7: 99.4 Percent
  • 8: 99.9 Percent 

Market participants are pricing in between 4 and 5 hikes with 5 hikes more likely than 4. 

FOMC Meeting Dates 

  1. March 16
  2. May 4
  3. June 15
  4. July 27
  5. September 21
  6. November 2
  7. December 14

Fed Projections as of December 15, 2021

Dot Plot of FOMC participant expectations, chart by the Fed, yellow and red annotations by Mish.

The Fed normally provides projections at the end of two-day meetings. It failed to do so in January so that dot plot is a bit stale. 

Analyst Projections

https://twitter.com/Sailorbt/status/1487273944625426435

Projection Synopsis

  • Bank of America amazingly projects 7 hikes, one at every meeting in 2022 plus 4 more in 2023. That would put the Fed Funds Rate at 2.75% to 3.00% at the end of 2023.
  • BNPP projects 6 this year and 3 more in 2023. That would put the Fed Funds Rate at 2.25% to 2.50% at the end of 2023.
  • Deutsche Bank and Wells Fargo project 5 this year and 3 more in 2023. That would put the Fed Funds Rate at 2.0% to 2.25% at the end of 2023.
  • Barclays and UBS project 3 this year with no forecast for 2023.

Seriously Delusional

The projections by Bank of America and BNPP are seriously delusional. 

I side with Brian Thede who says “Anyone who believes they hike so far they create an inverted yield curve is not playing with a full deck. The spread today would allow 2 hikes, that’s it. This narrative will change rapidly at some point soon.”

Note that the serious delusion (or purposeful lies) by Fed participants. Three hikes? OK, perhaps. Nine hikes is fantasyland material. 

Bank of America, BNPP, and the Fed are all in an alternate fantasyland universe.

Recession When?

After three hikes, the yield curve will at best be totally flat but more likely somewhat to seriously inverted and predicting recession.  

With Nearly Everyone Looking the Other Way, It’s Time to Discuss Recession

GDPNow Initial Forecast for 2022 Q1, Chart by Atlanta Fed, Chart Comments by Mish

Recession Call

I am sure I missed more idea but added points 7 and 8.

7. Major deceleration in deficit spending.

8. Declining working age population will reduce productivity.

Several people asked about my conclusion “I now expect a recession no later than the end of 2023,” wondering if I meant 2022.

I am frequently early in my recession calls, but 2022 is entirely possible. Either way, few are looking in that direction. 

And I am positive the Fed will not keep hiking if the economy weakens or the curve significantly inverts. 

For discussion of my recession call, inventory adjustments, and GDPNow trends, please see With Nearly Everyone Looking the Other Way, It’s Time to Discuss Recession

This post originally appeared at MishTalk.Com

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Mike Shedlock

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19 Comments
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PreCambrian
PreCambrian
4 years ago
A couple of points about the yield curve. First, the yield curve could rise on the long end as the Fed hikes short term rates. If the Fed was out of the market the curve would probably be steeper. Second, the inverted yield curve doesn’t create the conditions needed for a future recession but vice versa. 
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xbizo
xbizo
4 years ago
Funny, I conclude the opposite for point number 8.  Retirement of boomers will spike productivity.  The work will get done with fewer workers and more robots.  Quality of work may fall for a while, but I believe younger people will learn and grow quickly.  Maybe even be better.
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FooFooFed
FooFooFed
4 years ago
Mid terms soon and with prices still high from shipping bottlenecks Biden is looking for votes, maybe he leans into raising even if it kills the economy then after mid terms, if dems win big, slash rates and get back to hammering the economy in the drag on growth way. Either way you ruin something. One thing for sure… nobody wins at some point. Kill the fictitious stock market or kill growth thru more programs that buy stocks back and mark to model delusion. take ur pick
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vboring
vboring
4 years ago
Analysis during a pandemic is tricky.
Take away all of the pandemic spending programs that have kept people housed and fed, and what will the unemployment rate be?
As the bipartisan policy center puts it: 
“Before the COVID-19 pandemic, it was an ominous trend. Now that policymakers are enacting necessary, emergency measures to combat the crisis, federal budget deficits are escalating to levels not seen since World War II.”
We’ve been throwing EVERYTHING at the economy just to get by. What else can we possibly do if it turns out that isn’t enough?
A recession probably means a second Trump term, so there’s a lot of motivation to figure out solutions.
I’ll give long odds that we’re at zero or below Fed funds rate by 2023.
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killben
killben
4 years ago
“I am positive the Fed will not keep hiking if the economy weakens or the curve significantly inverts. “
What if inflation is still high say at 6% (might come down due to weak economy)?
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goldguy
goldguy
4 years ago
Here is how it plays out over time.  The fed gets in 1 or 2 rate hikes. Markets go to hell. 
They change the definition “stable prices” and we live with high inflation from that moment going forward.
Similar to the CDC changing the definition of what a vaccine is.
CLOWN WORLD
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Six000mileyear
Six000mileyear
4 years ago
I don’t see raising rate being limited by yield inversion. Any inversion should be short lived. Savers will chose to lend at the higher rate short term, thus forcing rates up in the next couple of bond durations. If inversion were such a problem then the bond market would never let them happen in the first place. Within the past 2-3 weeks Mish showed a chart of yields on US bonds. It showed the 20 and 30 year yields have inverted, as well as the  7 and 10 year yields.
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Tberend
Tberend
4 years ago
Reply to  Six000mileyear
Just want to note, 20yr-30yr inversion is a market technical
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Eddie_T
Eddie_T
4 years ago
How many hikes so far? Oh, right. NONE. Just threats.
How about that taper? Oh, right . I guess they meant AFTER they piled on even more to their bloated balance sheet, which they have been steadily doing
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MPO45
MPO45
4 years ago
According to this post back in December 2018, a recession was a few hikes away.   What’s your confidence level of a recession now?  I’m curious because I am going to bet my entire investment portfolio on your calls from now on.
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Mish
Mish
4 years ago
Reply to  MPO45
Let’s see 
December 2018 I said “slowly hiking into a recession” 
Recession started March 2020
14 months later. 
I think recession was a given even without Covid.
I tend to be early on recession calls and made one bad one believing the ECRI (who says it actually happened but the NBER did not record it). 
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1-shot
1-shot
4 years ago
It’s hilarious how the fed actually tells everyone exactly what they plan to do and no one believes them.
It’s like being told the winner of the super bowl in advance and betting on the other team
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Mish
Mish
4 years ago
Reply to  1-shot
Uh…. 
Please explain these 
Then apologize if you can’t
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Mish
Mish
4 years ago
Reply to  1-shot
The Fed’s rate hike projections and inflation projections have been nothing short of spectacularly wrong for a decade if not longer. 
And no Fed has ever spotted either a recession or economic bubble.
So if, you want to believe Fed projections, please stand up an salute Ben Bernanke while we laugh at you.
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vanderlyn
vanderlyn
4 years ago
Reply to  Mish
i think you and many are missing an obviously glaring situation.   the FED was established by benjamin strong of bankers trust.   it is owned and operated by and for the bankers who supply those projections and dot plots.    it’s a con.   a game.   to fool the people who think it is something different.    i think most folks who don’t get this reality have been had.     does this mean they are omnipotent and can control the world economy.   of course not.   but the privatization of the money supply over a century ago is probably the biggest scam of our age.      the bankers are not doing anyone any favors by their rate projections.    it’s a show.  and a way for them to fade the customers.   a classic book,  “where are the customers yachts”.   should be required reading for every junior hs student.    
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Doug78
Doug78
4 years ago
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TexasTim65
TexasTim65
4 years ago
Does the fed have to hike by .25 (quarter point) or more?
Maybe they just wimp out (something they are doing a lot lately) and just hike by .10 (tenth of a point) and do that several times so that 5 or 7 rate hikes would only total .5 to .7% total?
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Mish
Mish
4 years ago
Reply to  TexasTim65
There is no rule and I do expect 8th of a point hikes or cuts at some point.
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Scooot
Scooot
4 years ago
It’s interesting isn’t it. I’m not taking any notice of guesses for 2023, no one could possibly know what conditions will be like then any more than they could accurately guess the weather.
This year, for what it’s worth I’d still guess 3, perhaps 4, but I doubt they’ll be any September or November with the elections coming up? 
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