Fed rate hike odds 46%

Neel Kashkari’s remarks this week have forced investors to revisit a question that looked largely settled a few months ago: whether the Federal Reserve could still raise interest rates rather than cut them. The shift came after the Minneapolis Fed president warned on inflation and, according to market coverage on Aug. 5, said the central bank could still tighten policy. Markets responded by pushing up Treasury yields and repricing the odds of a hike, while attention also turned to Fed Chair Kevin Warsh’s effort to communicate less and potentially hold fewer policy meetings. ### Why did markets suddenly start talking about a hike again? The Federal Open Market Committee on July 29 kept the federal funds target range at 3.5% to 3.75%, but the vote was not unanimous. Three officials — Beth Hammack, Neel Kashkari and Lorie Logan — dissented in favor of a quarter-point increase, the Fed said in its statement. The same statement said inflation remained elevated relative to the Fed’s 2% goal, partly because of supply shocks including energy. (cnbc.com) Neel Kashkari then added to that hawkish readout on Wednesday. CNBC reported Kashkari said he was open to revisiting the Fed’s meeting schedule, while crypto.news reported that his inflation comments helped drive market-implied odds of a hike to 46%. Taken together, those developments gave traders both a concrete voting signal from July 29 and fresh public comments from one of the dissenters. ### Where does the 46% figure actually come from? (federalreserve.gov) CME FedWatch is the standard market gauge for implied odds of future Fed moves. CME says the tool tracks the likelihood of changes in the federal target rate using prices in 30-day fed funds futures, and it asks users to attribute those probabilities to “CME FedWatch.” The 46% figure cited in market coverage reflects a futures-implied probability, not a promise from policymakers. (crypto.news) That distinction matters because Fed officials set the rate, while FedWatch translates market pricing into probabilities. A jump in those odds means traders have become more willing to pay for protection against a higher policy rate. ### What does Kevin Warsh have to do with this move? (cmegroup.com) Kevin Warsh has changed how the Fed communicates since taking office in May, CNBC reported. The network said Warsh has curtailed forward guidance, shortened post-meeting statements and given less explicit direction in his two press conferences so far. American Banker separately reported that bond yields rose after Warsh’s second press conference and said banks may have to accept higher rates as the price of a more parsimonious Fed. (cmegroup.com) CNBC also reported that Warsh has floated the idea of reducing the long-standing schedule of eight FOMC meetings a year. The Fed’s own FOMC page says the committee currently holds eight regularly scheduled meetings annually. George Catrambone, head of fixed income for the Americas at DWS Group, told CNBC that less transparency would increase volatility and force investors to hedge across a wider range of outcomes. (cnbc.com) ### Why would fewer meetings matter to bond markets? Eight scheduled meetings give investors regular checkpoints for policy decisions and communication. If the Fed moved to six meetings, as discussed in CNBC’s report, the market would have fewer formal opportunities to hear from policymakers and fewer set dates to anchor expectations. Kashkari told CNBC there is “nothing magical” about eight meetings and noted the Fed can always call emergency meetings, though he said such a step sends a strong signal. (cnbc.com) American Banker framed the issue as a credibility problem for markets already dealing with less guidance. Its report said rising yields reflected concern that a less predictable Fed could leave banks and investors pricing in higher rates for longer. That is consistent with the market reaction seen after the July 29 meeting and in the days that followed. ### What should traders and borrowers watch next? CME FedWatch said on Aug. 6 that the next FOMC meeting is in 47 days. (cnbc.com) Between now and then, traders will be watching whether Warsh clarifies the meeting-schedule debate, whether Kashkari and other regional presidents repeat their hawkish tone, and whether incoming inflation data changes the market’s pricing again. (cmegroup.com) (americanbanker.com)