Tuesday, June 10, 2008

Will the Fed Raise Rates in August?

by Calculated Risk on 6/10/2008 06:09:00 PM

The buzz on the street is that the Fed might raise the Fed Funds rate 25 bps at the August meeting.

June Probabilities for Fed Fund Rate Click on graph for larger image in new window.

Here are the probabilities from the Cleveland Fed. As of yesterday, the market was still expecting no move in June - with the odds of a 25 bps rate hike increasing only slightly.

But all the tough talk about inflation and supporting the dollar is getting some attention.

The 2nd graph shows the August meeting probabilities as of yesterday.

As of yesterday, the implied probability of a 25 bps rate hike in August was below 40%.

August Probabilities for Fed Fund RatesHowever, according to a private calculation (using the August Fed Funds future contract), the odds of a 25 bps rate hike increased to over 70% today!

Raising rates with unemployment rising, and the economic risks to the downside, seems very unusual - but that is what the market expects.