Expectations for Higher Interest Rates Have Changed Dramatically

Posted by Patrick O'Connor on 6/17/08 12:51 pm

Just one week ago the fed funds futures contract was pricing in a zero percent probability for a quarter point interest rate hike at the next FOMC meeting on August 5, but then the probability recently soared to 65%, and then to 91% on Monday.  Read More.

The big reasons for the sudden change in interest rate expectations were Federal Reserve Chairman Ben Bernanke recently surprised the world by saying he supports a stronger dollar, several central banks appear to be working in concert to fight inflation, and Bernanke voiced concerns about headline inflation seeping into core inflation (prices minus food and energy).

Fortunately for the last item, today’s Producer Price Index revealed that it still appears that higher food and energy costs are not leaking into the core at the wholesale level.  The PPI’s May headline result came in at a staggering 1.4%, but the core was just 0.2%, thanks largely to a 1% drop in car prices.

As a result of the PPI, the probability rate dropped to 57%.  But keep in mind that the futures contract still expects a 69% chance for the fed funds rate to go up by three-quarters of a percent by November.  Read More.

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