Chart of the week: Fed rate hikes – more cautious and slow

  • Many investors continue to expect a third rate hike in 2017. The market-implied probability of a rate hike at the Fed’s December meeting, for example, has increased from approximately 23% in early September to nearly 80% this week before falling slightly just after Friday’s CPI report was released.16
  • If the FOMC indeed follows through on its estimates, investors can expect one additional rate hike this year and three more in 2018.17 Yet the current rate hike cycle stands out from others over the past 30 years as the FOMC has been notably more cautious and slow in the current cycle than in earlier tightening periods.
  • Since 1986, the FOMC has engaged in five sustained rate hike cycles. The cycles have ranged from as little as a 150 basis point hike over a 12-month period (starting in June 1999) to as much as the 425 basis point increase that began in June 2004 and lasted for two years.18
  • In the current cycle, the FOMC has raised the target federal funds rate five times for a total of approximately 125 basis points since it began tightening nearly two years ago.18 If current projections hold true, the target federal funds rate would rise another approximately 175 basis points between now and 2021.17
  • Even as many policymakers discuss the need to raise rates, it is important to keep in mind, as New York Fed President William Dudley noted in a recent speech, that the “upward trajectory of the policy rate path should continue to be shallow” in order to keep the economy on a sustainable path for growth.19

1 Federal Reserve Bank of St. Louis,
2 U.S. Department of Commerce,
3 Bureau of Labor Statistics,
4 Bank of America Merrill Lynch U.S. High Yield Master II Index.
5 Thomson Reuters Lipper.
6 Bank of America Merrill Lynch U.S. High Yield Master II Index (yield-to-worst).
7 Bank of America Merrill Lynch U.S. High Yield CCC & Lower Rated Index
8 Credit Suisse Leveraged Loan Index.
9 Credit Suisse Leveraged Loan Index (metals and mining component).
10 Credit Suisse Leveraged Loan Index (energy component).
11 Federal Reserve Bank of St. Louis,
12 U.S. Federal Reserve,
13 U.S. Federal Reserve,
14 The Wall Street Journal,
15 University of Michigan,
16 Bloomberg, based on CME data.
17 Federal Reserve Summary of Economic Projections,
18 U.S. Federal Reserve, Bloomberg as of October 12, 2017.
19 Federal Reserve Bank of New York,

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