Here is the CME Group interactive Fed Watch tool. These models show that yesterday, the odds of a rate hike at all in 2016 were about 35%. That has fallen to about 25% today. My model, which is based on the curvature of the yield curve showed a mean expected rate hike date in August, yesterday. But today, that has moved all the way back to May 2017, with a slope after that which is still about 8 or 9 basis points per quarter.Striking Capitulation in the Fed Funds Futures Market: Probability of Fed Rate Hikes Now vs. Jan. pic.twitter.com/nEhE74ECjV— Michael McDonough (@M_McDonough) February 8, 2016
I use Excel Solver to do the estimate, and, interestingly, Solver seems to have more than one optimal answer on the yield curve data from yesterday and today. One answer is the August and May inflection points. The other answer is basically that the next rate hike is highly uncertain, and far in the future. Since expectations of remaining at zero do not affect the inflection point, because there is no inflection point in that case, I think my model is giving a different answer than the models that are based on rate levels. I think the correct way to read all of this is that about 1/3 of the market thinks rates will rise, with a mean date of next May, and it will rise by about 25 basis points per quarter. The other 2/3 of the market thinks rates will not rise at all.
The biggest red flag here is that, as far as I can tell, there is apparently zero expectation of a possible retrenchment. The clear response right now would be to take a do-over and move rates back to near zero. And there is no expectation of that happening at all, that I can tell.
The populists and Austrians think this is just proof that we have a bubble economy that can't grow without monetary stimulus. They seem to like it when this happens, as if the S&P 500 at 2100 was fake and it is only real at 1850, or maybe 1600, or maybe less. We've got a case of national Munchausen Syndrome.
Don't even worry about suggesting some optimal monetary policy. Just give me a policy that isn't vulnerable to explicit communal self-immolation.