Investors are betting on a less aggressive normalisation process by the Fed

Investors bet up to a maximum of 5 interest rate hikes by the Fed this year, according to the CME’s FedWatch tool. The FedWatch calculates the probabilities assigned to a spectrum of target interest rates for all upcoming FOMC meetings. The implied probabilities of possible Fed Fund target rates are based on the prices of Fed funds futures contracts, assuming that the rate increase is 0.25% (25 basis points) and that the Fed Funds Effective Rate (FFER) react for a similar amount. Implied probabilities related to FOMC meetings are determined by futures contracts, as reported by the CME Group.

For the FOMC meeting on November 8, investors attribute a 94.8% probability that the Fed Funds will be in the current range of 200-225 basis points, up from 93.5% in the previous week and a probability of 5.2% ranging from 225 to 250 basis points, down from 6.5% the previous week.

For the last FOMC meeting of the year (December 19), investors attribute a 26.2% probability that interest rates will be in the current 200-225 basis points range, up from 13.0% of the previous week, a probability of 70.0% that are in the range of 225-250 basis points, down from 81.4% in the previous week, and a probability of 3.8% that are within the 250 range -275 basis points, down from 5.6% the previous week.

Finally, for the first FOMC next year (30 January), investors attribute a 25.1% probability that interest rates are in the current range of 200-225 basis points, up from 12.4% of the previous week, a probability of 68.1% that are in the 225-250 basis points range, down from 78.5% the previous week and a 6.6% probability falling within the 250-275 range basis points, down from 8.9% the previous week.

Therefore, this week the probability spectrum has moved towards a scenario of less aggressive increases compared to last week.