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Net Net: Promoting innovation and managing change

Traders pricing in only one Fed rate hike in 2016

What's next for the Fed? Five truths for 2016
What's next for the Fed? Five truths for 2016

The rapid tumble in the stock market has brought with it a correspondingly quick slide in interest rate expectations for 2016.

Traders now believe the Fed is likely to hike rates just once this year, with that move likely being postponed at least until September, according to the CME FedWatch tracking tool. That contrasts with earlier expectations that the Fed could move two or three times.

In December, the Federal Open Market Committee hiked the funds level it uses to target broader interest rates by a quarter point. At the time, FOMC officials, through the so-called dot plot of future expectations, indicated the Fed would move four times this year, presumably once a quarter at the meetings where Chair Janet Yellen holds a news conference afterwards.

However, market turmoil has ensued since the rate hike, which was the first in more than nine years. The has tumbled about 11.5 percent during the period.

Janet Yellen
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Traders now assign just a 29 percent chance to a March hike, compared to 53 percent a month ago. The September meeting is at 51 percent, with the greatest level of confidence for December, which is at 60 percent. Those moves have come despite several prominent Fed officials publicly holding to the line that the central bank plans on continuing its rate hike trajectory.

But bond markets also have been casting doubt on a hike as well, with the benchmark 10-year yield sliding below 2 percent and the yield curve, or difference between various durations in fixed income, flattening.

"We've been watching what the Treasury market has been saying about the rate hike from the get-go," said Quincy Krosby, market strategist at Prudential Financial. "They're telling you this could be a policy mistake."

To be sure, fed fund futures trading is volatile and could swing back just as quickly. But for now, markets are expecting a dovish Fed through the end of the year.