I was watching the Asia First programme on CNA this morning when the presenter talked about CME's FedWatch Tool [here].
As explained on the website, the FedWatch Tool calculates unconditional probabilities of Federal Open Market Committee (FOMC) meeting outcomes to generate a binary probability tree.
The probabilities of possible Fed Funds target rates are based on Fed Fund futures contract prices assuming that the rate hike is 0.25% (25 basis points) and that the Fed Funds Effective Rate (FFER) will react by a like amount. (For more information on the methodology, click here.)
What interested me was that based on the data at time of writing, the market is pricing in a 96.8% probability that the U.S. Fed will hike 75 bps - yes, 75 basis points, not 50 anymore - during tomorrow's FOMC meeting.
Figuratively, it is no longer about the U.S. Fed slamming the brakes on the economy. It is about the U.S. Fed throwing everything, including the kitchen sink in an attempt to tame the runaway inflation.
I'm not sure if the prophesied recession will materialize or not, but the simple fact that the U.S. Fed is hiking interest rate faster than previously expected means that perception will change within the population.
When a person thinks the near-term future is going to be financially challenging, that person will likely adopt a series of actions to mitigate the effect. For business owners, this means manpower hiring freeze or holding back on business expansion. For consumers, this means cutback on unnecessary expenses or simply saving more.
All of these actions will have a follow-on impact on the economy and companies' top line. When profits are squeezed, further mitigative actions are taken and the tightening cycle goes on.
Hopefully, the fear does not spread maniacally, and we can avert a recession, even by a slim margin.
As explained on the website, the FedWatch Tool calculates unconditional probabilities of Federal Open Market Committee (FOMC) meeting outcomes to generate a binary probability tree.
The probabilities of possible Fed Funds target rates are based on Fed Fund futures contract prices assuming that the rate hike is 0.25% (25 basis points) and that the Fed Funds Effective Rate (FFER) will react by a like amount. (For more information on the methodology, click here.)
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| CME FedWatch Tool. |
What interested me was that based on the data at time of writing, the market is pricing in a 96.8% probability that the U.S. Fed will hike 75 bps - yes, 75 basis points, not 50 anymore - during tomorrow's FOMC meeting.
Figuratively, it is no longer about the U.S. Fed slamming the brakes on the economy. It is about the U.S. Fed throwing everything, including the kitchen sink in an attempt to tame the runaway inflation.
I'm not sure if the prophesied recession will materialize or not, but the simple fact that the U.S. Fed is hiking interest rate faster than previously expected means that perception will change within the population.
When a person thinks the near-term future is going to be financially challenging, that person will likely adopt a series of actions to mitigate the effect. For business owners, this means manpower hiring freeze or holding back on business expansion. For consumers, this means cutback on unnecessary expenses or simply saving more.
All of these actions will have a follow-on impact on the economy and companies' top line. When profits are squeezed, further mitigative actions are taken and the tightening cycle goes on.
Hopefully, the fear does not spread maniacally, and we can avert a recession, even by a slim margin.
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