Fed: Odds of a rate hike at 21% - BBH

Research Team at BBH, suggests that the last two weeks have been about the US as first, it was Jackson Hole where Yellen, Dudley, and Fischer signaled that the time was approaching to take another step in the normalization of monetary policy, without specifying precisely when and then it was the US employment report.

Key Quotes

“After the July employment data in early August, the US 2-year yield was at 72.2 bp.  It finished last week at 78.6 bp.  It was down six basis points on the week, with the decline mostly the result of the disappointing manufacturing ISM earlier in the week. The yield closed fractionally higher after the August employment report before the week the weekend.  

The September Fed funds futures implied a yield of 41 bp after the July jobs data, and after everything was said and done, it implied a 41.5 bp at the end of last week.  The net change after the August jobs report was a quarter of a basis point or the spread between the bid and offer.   By our calculation, the implied 41.5 bp yield is the same as a 22% chance of a rate hike later this month.  Bloomberg's WIRP, which has become a widely cited benchmark, puts the odds at 32%.    

The CME, where the Fed funds futures trade, offers its calculation here.  Its estimate is close to ours, and it puts the odds of a rate hike at 21%.  Reasonable people may have different ideas on where Fed funds will average after the hike.  They have been averaging 40 bp since late-June, but before then, they often were below the midpoint of the 25-50 bp range.  We made the unbiased assumption that Fed funds would average the midpoint of the new 50-75 bp range or 62.5 bp.”