50% Chance

Last December, policymakers forecast that the Fed would raise rates four times in 2016. With three more meetings to go (including today’s) and having hiked exactly zero times so far, there is no possibility at all that they are not going to hit four.  Last month, the Chair and Vice-Chair hinted that the central bank could plausibly effect two rate hikes this year.  Even still, only two out of the 23 Fed preferred bond traders think that a rate hike will be announced at the conclusion of tomorrow’s meeting.  Futures traders are pricing in a 20% chance that the Board of Governors hike the discount rate tomorrow.  I on the other hand think that tomorrow could be the day that they do kick the rate up .25% to a whopping .5%.  This accomplishes two things: The first is conveying the sentiment that the economy is in fact getting better, instilling confidence in a financial system that has been in the sickbed for the better part of a decade.  The other agenda accomplished by a rate hike tomorrow is giving the Fed additional ammunition to drop interest rates again in the future when there is a slowdown (see, I am not entirely optimistic).

I place the probability of a rate increase tomorrow by the Fed at 50%.  And if they do, I see mortgage rates dropping again.