December Rate Hike Remains Likely

CMEGroup fed funds futures remain heavy, in tandem with the weakness in Treasuries. The rise in implied rates now shows about a 72% implied rate increase for December, with the markets seeing strong probability for a Federal Reserve rate hike by year-end. Few anticipate any action at next week’s Nov. 1 to 2 policy meeting due to the proximity of the Nov. 8 national elections. Participants expect to read something very similar to the September statement that indicated a patient approach was taken, awaiting more evidence employment and inflation goals were being met.

The preponderance of Fedspeakers advocating a December tightening, including the 3 dissenters in September (Kansas City President Esther George, Cleveland’s Loretta Mester and Boston’s Eric Rosengren were stumping for a 25 basis point hike at that meeting) and 9 of 12 District banks voting for Discount rate hike. December is on on the table, even if Chair Janet Yellen’s Oct. 14 speech injected some doubt. There are still several pieces of data to be released between now and the mid-December meeting that might sway the vote. But, recent numbers have supported a jump in Q3 gross domestic product (GDP), and if other reports, especially the jobs data, corroborate that outlook, a 25 bp tightening at the end of the year can be almost assured.

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