Here Are the Fed Rate Hike Odds

As of Tuesday, May 30, 2017, the Fed rate hike odds sit at 88.8%, according to CME Group's FedWatch Tool.

And there are two reasons why the markets are so confident the Fed will raise rates in June 2017...

Fed rate hike oddsThe first reason stems from the Federal Reserve's December 2016 announcement that it wanted a total of three rate hikes in 2017. Rates were raised in the March FOMC meeting from 0.75% to 1%, but were left unchanged at the May FOMC meeting.

And if FOMC officials want to meet their objective of three rate hikes, they have to raise rates soon.

After the June 2017 FOMC meeting, there are only four more meetings for the year. To spread out the rate hikes, the markets are placing the highest odds on the Fed raising rates in June and then again in December 2017.

The second reason to expect a Fed rate hike in June is strong job growth numbers and low unemployment totals.

According to the May 2017 FOMC meeting minutes, the Fed will raise rates when it sees evidence of strong economic growth.


How Interest Rates Are Set

And compared to last year, it looks like job growth is stronger, and unemployment rates will be lower.

Last year, analysts expected 162,000 jobs to be created in May 2016, and the unemployment rate was 4.7%. This year, analysts expect 185,000 jobs will be created, and the unemployment rate will be 4.4%.

Job growth totals and the unemployment rate will be announced on Friday, June 2, 2017. Barring underwhelming totals, the Fed will have enough justification to move forward with an interest rate hike.

However, the Fed could always change its mind and keep rates unchanged. And because that would create uncertainty, stock and bond prices could become volatile.

Trending: The 7 Best Dividend Stocks to Buy in 2017

"Earnings drive stock prices. Interest rates drive bond prices. And this can make it extremely difficult to know exactly how to protect your portfolio (and still profit) in the markets - especially in the face of a 90% or better chance of an interest rate hike," Money Morning Options Trading Specialist Tom Gentile said on May 26.

This uncertainty is why Gentile has a strategy for our readers that can not only protect your portfolio, but also provide profits.

Here's everything you need to know about Gentile's protection and profit strategy...

Make These Moves Now as the Fed Rate Hike Odds Increase

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Exchange-traded funds (ETFs) are an easy solution for portfolio protection and profits if the Fed raises rates.

"ETFs basically let you trade an entire sector instead of having to pick and choose specific stocks to trade within a sector. ETFs are also a great way for you to hedge against rising interest rates," Gentile said on May 26.

For stocks, Gentile recommends monitoring the SPDR Dow Jones Industrial Average ETF (NYSE Arca: DIA). For bonds, he recommends monitoring the iShares 20+ Year Treasury Bond ETF (NYSE Arca: TLT).

"Now, bonds and stocks don't always have an inverse correlation, but most of the time they do. So when the Fed decides to jack up rates on June 13, DIA and TLT are the best two considerations to have in your portfolio for both protection and profits," Gentile said.

When the Fed raised rates on March 15, the DIA fell by 1.86% over the next month. In comparison, the TLT stock price climbed 5.01% over the next month. If there is a rate hike, investors can open a bullish position on TLT and a bearish position on DIA.

For investors who believe rate hikes will remain unchanged, a bullish position on DIA and a bearish positon on TLT can be opened.

"In either case, you've got a way to hedge against, and profit from, any action the Fed takes next month - and any time after that. Of course, you'll want to talk to your broker before you make any changes to your portfolio," Gentile said.

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