Photographer: JOSHUA ROBERTS/Bloomberg

The Fed May Not Have a Magic Number for Hike Bets: Strategists

Do 70% market-implied hike odds give the green light?

The Federal Reserve may not be so worried about getting markets’ buy-in for a rate hike.

Last year, as the Fed was looking to get off the zero lower interest-rate bound for the first time in years, former U.S. Treasury Secretary Larry Summers observed that the bank had never in the previous 20 years raised rates without the futures market pricing in at least a 70 percent chance of a hike. 

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Markets are currently pricing in a 72 percent chance of a rate hike by the December meeting, according to data compiled by Bloomberg — but strategists suggest Summers' criterion may be a necessary but not sufficient condition of that move. Here’s what they said in interviews about whether market bets will sway the Fed:

BMO Capital Markets (Ian Lyngen)

“I don’t know that there’s a magic number” for the Fed to hike rates, but at the current level from the market’s perspective, the Fed has “certainly done a commendable job in prepping the market for a rate hike.”

Market pricing is “clearly no longer a hurdle” for the Fed to hike in December. “If they were worried about surprising the market, that’s no longer a concern.” The next few weeks shouldn’t “materially change” the market’s expectations for where rates will go, but “will determine if it’s a choppy path to get there.”

Bank of America (Michelle Meyer)

Current market pricing is “appropriate” and is “a function of what the Fed has attempted to convey.”

The Fed has been “very clear” in its communication from the September meeting and press conference; officials “clearly signal” intention to hike before year-end, and speeches thereafter have reinforced that. Data has been “generally fine” enough to justify a December hike but growth and inflation figures are unlikely to be at the “exceptionally strong” level needed to force a hike in November.

BNY Mellon (Marvin Loh)

The current market pricing “certainly makes it easier” for the Fed to hike as markets “won’t be shocked,” though it still must be “economically justified.”

A November hike is a “distant, distant probability.” The argument in favor of November would be that it could show Fed “independence” from financial markets, but “they certainly haven’t.”

Credit Suisse (William Marshall)

If the market maintains current pricing expectations, that will be “more than enough to make the Fed comfortable” with hiking. Most of the work in terms of prepping the market for a hike before year-end has already been done.

The Fed is still “data dependent.” Payrolls and inflation are “critical” leading up to December, as economic signals “aren’t so strongly in favor of a hike,” but there’s still “enough desire” for Fed to see more prints.

“What’s still striking to me is that we certainly have priced in more this year, but still a very shallow path, and not a ton of path being priced in for end of next year... the market isn’t totally off base, it’s a degree of wanting to see evidence that the economy is strong enough to allow for more tightening.”

JPMorgan (Michael Feroli)

If the Fed does hike in December, “by the time we get to that meeting, the expectations would be even greater than they are now." Feroli agrees with Evans’s call for 3 hikes between now and end-2017.

It would be “harder for Fed to move” if monthly job gains average below 100,000, and it’s “hard to say” if the election can be dismissed as a risk event for the Fed to act independently of results.

Macquarie (Thierry Wizman)

Wizman still sees the odds of a December hike at 75 percent. Time is the most important factor in the Fed’s decision, as with less time, there’s a lower probability of negative surprises. The election is also important, as a “status quo outcome politically to lead to rate normalization.”

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