There has been some chat in the press over the past days suggesting a 50% chance of a hike in March. We think this is a little misleading. A well-used analytical tool on Bloomberg shows a 50% probability, but this number uses the midpoint between the upper and lower bounds of the Fed Fund corridor as the most recent fixing, so this is currently 62.5bps.
However, if we look at the future market where futures trade on the average effective rate (not the midpoint of Fed Funds), this is currently 66bps and has remained very stable over the past few days.
So by our reckoning if you compare the spread between the effective rate from the futures market and the Fed Fund it looks like media observations are overstating the probability of a March rate hike. We think the actual probability is 36% (not a half). We work this out by using the April futures contract expiry price of 75bps, less the effective rate of 66bps which equates to 9bps; so if there is a 25bp rate hike the chances from the more dynamic futures market are 9/25 i.e. 36%.
Here is the effective rate vs the lower bound of 50bp: