Chart of the week

With rate hikes none or one, income to remain elusive

Income could be hard to find for the foreseeable future. This week’s chart looks at market-based expectations for rate hikes through Dec. 2022.

July 30, 2021 | 2 minute read

Probabilities to Fed rate hikes as of year-end 2022

Source: CME FedWatch Tool, as of July 28, 2021.

  • The Fed ended what could be described as a relatively uneventful meeting this week. As expected, it made no changes to the target Federal Funds rate, nor did it release a new Summary of Economic Projections (the dot-plot).
  • The post-meeting statement provided a clue that policymakers are getting closer to scaling back their bond purchases that have generally remained on autopilot since the start of the pandemic. Yet it provided no specifics with respect to timing of the potential tapering, noting only that the Committee “will continue to assess [economic] progress in coming meetings.”1
  • Perhaps the most substantial takeaway from the meeting may be that the search for income seems likely to remain a challenge for investors through at least the next year. Fed Chair Powell sounded a fairly dovish tone following this week’s meeting, reversing any perceived hawkishness from the Fed’s June meeting. In turn, market-based expectations for when the Fed will raise rates reverted to where they were prior to the June meeting.
  • The chart shows the evolving probability of Fed action before December 2022.2 As it highlights, the likelihood of one rate hike has remained relatively stable since May.2 Perhaps more interesting, however, is that the likelihood of no hike has spiked in recent weeks while two or more hikes has fallen from a high of approximately 35% to just 20% after the dovish-sounding July Fed meeting.2
  • Policymakers made clear this week that they are in no real rush to act, whether tapering bond purchases or eventually raising rates. Against this backdrop, rates will likely remain at or near their historical lows for the foreseeable future and, as a result, investors will continue to face difficulties finding competitive income within traditional income-producing investments. 

  • Federal Reserve,

  • Bloomberg Finance, L.P., as of July 28, 2021. Based on Fed Fund Futures contracts.

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