The US dollar is riding high ahead of the FOMC and at or near the best levels in years right across the board.
For the bones of the decision, a 75 bps hike is expected but not fully. The pricing suggests an 81% chance with a 19% probability of 100 bps.
From where I stand, if the Fed was going to surprise the market with a 100 bps hike, they would have leaked it by now like they did in June. So it’s a safe bet that 75 bps is coming and that should provide some relief to risk assets and weigh on the dollar.
But that’s assuming we don’t learn anything else at the same time. The market is now pricing in a terminal rate of 4.55% in March, which is up a half point this month.
We’ll get a dot plot that indicates the Fed will stay higher for longer but that’s predicted on decent economic growth, which is why I’ll be checking the GDP projections as closely as the rate projections. Lately, you can see markets signaling that there might not be decent economic growth globally, and certainly not in Europe.
So the key question coming out of the Fed is what will be their next steps if the economy begins to falter? They like to talk tough but plenty of people in the markets think that’s a bluff and I don’t think anything they can say will change that.
So what we’ll see is:
- 75 basis points to a range of 3-3.25%
- Tough talk on inflation
- Higher dot plot for longer (but not 2025?)
- A hint that there will be a pause at some point?
I think the first three are priced in but the last point could offer some relief. Remember that the single best day to own stocks over the last 30 years is Fed day — the angst rarely matches the reality and sentiment is terrible right now.
But the US dollar is at some real pivotal levels. If the Fed manages to exceed the high bar of hawkishness that’s already priced in, then we could see a runaway dollar.
The question comes down to: What will the Fed do if the economy stumbles?
There’s a game of chicken going on today in markets. If they’re taken hawkish there will be a rout.
I talked more about all these factors with BNNBloomberg in an interview yesterday: