While traders seem close to unanimous on expectations that the Federal Reserve will raise interest rates by a notch on Wednesday afternoon, opinions differ widely about what will happen beyond that.
On Wednesday, less than two hours ahead of the Fed statement, the market is pricing in a 92.7% probability for a 25-basis-point rate hike to the 3.75%-4.00% range, according to the latest data from CME Group's FedWatch Tool. For the October meeting, which is mere days before the November midterm elections, traders are currently betting on a 54.9% probability that rates will stay in that range and a 41.1% chance of another 25 bps hike.
For December 9, they are pricing in a 50.2% probability for a 25 bps increase to the 4.00% to 4.25% band and a 27% chance of a jump to the 4.25% to 4.5% range.
Matthew Ryan, head of market strategy at global financial services firm Ebury, says he is now firmly expecting a one-notch hike from the Fed on Wednesday, "even if only to preserve its waning credibility."
"The key variable is whether this marks the start of a tightening cycle, is a one and done move or something in between," Ryan wrote.
"We are still not convinced that the case for hikes is particularly strong. Treasury yields continue to climb, acting as a form of tightening, core inflation is contained and the labour market, while resilient, is not firing on all cylinders."
The strategist expects Warsh to warn about the inflation risks from the Iran conflict, but noted that he expects the policy chief "to leave the committee’s next move deliberately unclear, which could disappoint the rather hawkish expectations."
But at least investors will be able to see the latest set of Summary of Economic Projections as September is a "dot plot month."
"A modest upgrade here to show one further hike in 2026 is possible, but not our base case, as the Fed has historically preferred to under promise and over deliver if needed with these projections," he said.
However, if the Fed upgrades PCE inflation projections this could "hint at further hikes, without needing to explicitly indicate as much." But Ryan said that it could signal that "second round effects remain contained for now" and that this could limit dollar gains in the event of a hike.
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