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Rate Hike Probabilities: What Do the Data Say?

Recent numbers suggest a rate hike later this month is still possible, and most market participants expect one before year's end.

Roland Czerniawski: The timing of the Federal Reserve's next interest-rate increase is a widely discussed topic in the markets today. This week's chart focuses on the probability of an interest-rate hike at future FOMC meetings. The source of this data is the CME FedWatch tool, which calculates the implied probability of a rate hike based on trading activity in the Fed funds futures market. In other words, this data shows the expectations of market participants regarding the future rate increases. This is not a survey of economists. Instead, it is based on real purchases being made with real dollars.

According to the data, only about a quarter of investors expect that the Fed will raise interest rates at its Sept. 17 meeting. Those probabilities are cumulative, so as we go further in time, the probability increases. Interestingly, the chance of a rate hike at any time in 2015 is about 60%, which is far from a done deal according to the data as of Sept. 2. It is important to underline that this data is relatively volatile and could fluctuate based on day-to-day market developments, including economic data releases such as jobs reports. The up-to-date data is available daily at the CME website to all viewers who care to look.

The Federal Reserve is in a difficult situation as the U.S. economy shows continued signs of strength, while volatility--due primarily to data and events outside the U.S.--continues to rock the markets. Despite the fact that most market participants don't expect an interest-rate increase this month, it nonetheless remains a real possibility that investors should be aware of.