CME’s Federal Reserve Observation and the Probability of Interest Rate Hikes

03/10/2023 13:41 • Digital Disruptors • 86 views

According to CME’s “Federal Reserve Observation”, the probability of the Federal Reserve raising interest rates by 25 basis points to 4.75% – 5.00% in March is 35.4%, and the probability of raising interest rates by 50 basis points to 5.00% – 5.25% is 64.6%; By May, the probability of a cumulative interest rate increase of 50 basis points is 28.7%, the probability of a cumulative interest rate increase of 75 basis points is 59.1%, and the probability of a cumulative interest rate increase of 100 basis points is 12.3%. (The same as before the announcement of non-agriculture)

After the announcement of non-agriculture: the probability of the Federal Reserve raising interest rate by 50BP in March is 64.6%, which is the same as before the data release

Analysis based on this information:

CME’s “Federal Reserve Observation” has provided insight into the possibility of interest rate increases by the Federal Reserve in the coming months. The report indicates that there is a 35.4% chance of a 25 basis point rate hike to 4.75% – 5.00% in March. Additionally, there is a 64.6% chance of a more significant 50 basis point raise to 5.00% – 5.25% during the same period.

In May, the probabilities increase as the report suggests a 28.7% chance of a cumulative interest rate increase of 50 basis points, a 59.1% chance of a cumulative interest rate increase of 75 basis points, and a 12.3% chance of a cumulative interest rate increase of 100 basis points.

The report’s findings reflect market expectations and have important implications on investments, particularly in the bond and equity markets. A rise in interest rates makes borrowing more expensive, which may put pressure on the returns of companies that rely heavily on debt to finance their operations. Additionally, higher interest rates can lead to a shift in investor preferences towards bonds and away from riskier assets such as stocks.

Moreover, a series of interest rate hikes by the Federal Reserve can influence foreign exchange rates as well. When the interest rates in the United States are higher relative to other countries, the US dollar becomes a more attractive currency to hold, leading to an appreciation in its value. This can have implications for international trade and investments.

In summary, CME’s “Federal Reserve Observation” provides insight into the financial market’s expectations of interest rate adjustments by the US’s central bank. The probability of a 50 basis point rate hike in March is higher than that of a 25 basis point increase, indicating investor sentiments towards a larger interest rate adjustment. Additionally, the report underscores the importance of keeping an eye on interest rates and their impacts on the various areas of the financial market.

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