61% Chance Fed Will Raise Rates in June 2015

The Federal Reserve wrapped up their two-day meeting on the back of strong GDP numbers which surprised every analyst estimates and rising employment numbers that are pointing to employment that is back to the levels seen in 2007 and possibly even 2006. The Federal Reserve acknowledged that inflation appears to be firming up.
While short-term interest rate futures barely moved after the meeting, CME FedWatch which tracks rate-hike expectations by plotting fed funds futures contracts show that the market is assigning a 61 percent chance that the first Fed rate hike will be in June 2015.
Meanwhile traders of Fed contracts currently show about a 44 percent chance of a hike in rates at the April 2015 Fed meeting.

Bond Buy Ends October

At the rate the Fed is winding down the Quantitative Easing bond buying program, it will end by October unless something changes and the Fed extends the bond buying or reduces the amount of tapering it is engaged in.

Dow Reaction

Part of the decline in the Dow today was the Fed meeting combined with the GDP numbers showing a very strong quarter. The GDP numbers on their own are advising investors that the economy is expanding. That means interest rates cannot stay at zero to a quarter of a percent for much longer without risking higher inflation.

All of this will continue to weigh on stocks going forward and at one point today the VIX Index spiked to $14.07 with the Dow pulling back.

VIX Index July 30 2014

Preparing For Higher Volatility

Rising Interest rates mean higher volatility is ahead for stocks. Higher volatility means better option premiums but also increases the risk to capital invested. This should be considered when trading in options, particularly selling options in August and into the fall. Stocks could have a rougher time than originally intended. This though also means that I can place smaller trade sizes but earn larger premiums which means I can use less capital to enjoy the same income levels as when volatility was lower. Just something to prepare for as we enter the fall trading period.

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