Money markets have fully priced in a 50 basis-point hike by the FOMC at its meeting today. Anything else could send shockwaves across asset classes. The announcement of a start date to the Fed’s quantitative tightening is also widely anticipated.
While the Fed’s policy decision due today has been well telegraphed, the more pressing unknown for investors and traders is whether a 75 basis-point hike could be in the Fed’s policy pipeline over the coming months. As things stand, Fed Funds futures are already pricing in half-point hikes in June, July and September. Scorching hot consumer prices are forcing the Fed to “front-load” its rate hikes, which Fed Chair Powell cited as a possibility before the black-out period prior to this meeting.
Markets are primed to react to whether Powell turns up the hawkish dial even higher at his press conference. Refusal to overtly rule out a 75 basis-point hike may be interpreted as a hawkish signal, which should translate into more gains for the US dollar while sending the rest of the FX universe into a spiral.
Policymakers must walk a tightrope between staying aggressive to have a fighting chance at restoring their inflation-fighting credibility, while trying to pilot the economy into a soft landing. The Fed certainly faces an unenviably delicate task as one slip could break the economy and push markets into a sharper nosedive.
