The main message from this past week was that more than a couple Fed officials seriously want June to be at least on the table for liftoff even if they don't really think a June hike is likely. September is still the prime target for liftoff, although it will depend on whether the data continues to trend as it has or whether the economy accelerate or decelerates significantly. But for now, the trend points to September liftoff.
I'm updating my outlook for Fed rate hikes in 2015 to put a 55% chance (down from 58% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September, a 53% chance of a second hike in December, and only a 43% chance of a third hike (to 1.00%) in January.
IOW, the fed funds target rate will be only 0.75% at the end of the year, which is a rate that is still very supportive of stocks and the stock market.
The odds for a second hike in October are only 39% (down from 43% a week ago), not even close to a coin flip. So, even nine months from now, the fed funds rate will still be only 0.50%, which is truly insignificant for stocks and the stock market.
My forecast is based on the fed funds futures probabilities provided by the CME Group FedWatch web page:
These numbers are based on fed funds futures contract prices, so they are what actual market participants are betting, not the mere whim of some economist or pundit - or even the Federal Reserve itself.
The big debate right now is when the patience language will get removed from the official FOMC meeting statements since that language is assuring people that liftoff will not occur for at least a couple of meetings, with couple being two according to Yellen. Given that the patience language is still operative, that means that no hikes are likely for the next two meetings, March and April, leaving June fair game. If they leave the patience language in their statement in March, that would officially take June liftoff off the table.
The Fed Beige Book is their official input for the state of the economy and business conditions in particular. The next beige book will be released on Wednesday, March 4th. If it shows the economy as strengthening further or at least maintaining its previous trend, then it will be a slam dunk for the patience language to be removed at the March 17-18th FOMC meeting. But if there is any new weakness or concern raised, that would make it a slam dunk to keep the patience language for at least another meeting, taking a June liftoff officially off the table.
Incidentally, the CME Group odds for liftoff in July are now 36% (down from 39% a week ago), and 17% in June (down from 18% a week ago.)
-- Jack Krupansky