"Dovish" Fed Expectations Collapse To Lowest Since 2015

Back in the middle of February - during the height of the financial-market turmoil, the market was pricing in a shockingly policy-error-ish 36.5% chance of a rate cut in 2016. Since then The Fed has done everything it can to try and regain credibility - attempting to be hawkish in the face of dismal data, baffling everone with bullshit, and droning on about data-dependence. Now, thanks to the FOMC Minutes released last week with officials suggesting investors may be underestimating the pace of tightening, the odds of a 2016 rate cut have collapsed to just 4.8% - its lowest since New Year's Eve.

As Bloomberg details in the chart below, the probability of the Federal Reserve cutting U.S. interest rates in 2016 has fallen below 5 percent for the first time since New Year’s Eve, according to options on eurodollar futures contracts.


The bottom line is: The Fed's jawboning has 'worked' at the shortest end of the curve with Janet and her friends seemingly dead set on at least one more hike this year.

However, as we have previously noted, while bets on lower rates (and in fact negative rates) have fallen modestly for 2016, they continue to rise for 2017...


[the chart shows the cumulative open interest in par calls on eurodollar futures contracts that expire in 2016 and 2017 - basically options on short-term interest rates with a strike price of zero, such that they pay out if the Fed takes rates negative]

So it appears the market is pricing in another rate hike in 2016, shortly followed by QE (stocks trade notably rich once again to The Fed balance sheet), with rate cuts to ZIRP or NIRP in 2017.