UBS: Air of mystery

In courtship, it is often advisable to cultivate an air of mystery. Reveal everything (figuratively) to a potential suitor, and you are no longer in control of the conversation. The Federal Reservelong ago abandoned their own air of mystery, and decided to reveal everything to the market by publishing their rate projections. But the only problem is that the market does not believe the Fed's "dot plots". The Fed insist they are likely to hike rates several times, but the market found that as believableas a blind date claiming they are actually a secret agent.

In an effort to rekindle the romantic mystique, the Fed has been trying to generate a bit more uncertainty. First the minutes to the last meeting stressed that June was a 'live' meeting. So, despite the market's scepticism, the Fed would likely vote on whether to hike rates next month. Then BillDudley, the influential President of the Federal Reserve Bank of New York, commented that the market was now more appropriately pricing in the probability of a June rate hike. Before the minutes the market had only priced in a 4% chance of a rate hike in June; that has jumped to almost 30% (Chart 1).And the probability of two rate hikes this year doubled from about 30% to 60%.

The pricing of rate hikes has been on a bit of a roller-coaster ride. When fears for the US economy were at their peak back in February, the market decided rates were on hold. Then right before the March meeting the probabilities rose once more, only to plummet again when Fed Chair Janet Yellen came across asmore dovish. Despite the improvement in the probability of a June rate hike, the likelihood is still priced below where it was in March.

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