The market has little doubt that the Federal Reserve will raise rates by 75 basis points to a range of 3.75-4.00% at 2 pm ET today. The implied probability of a 75 bps hike is 97.3% with the remainder priced for a shock 100 bps hike.
The intrigue begins in December, where the market is leaning to another 75 bps hike but not there yet. Pricing is at 4.427%, which is a 71% chance of 75 bps and the remainder at 50 bps.
That number has bumped up this week on the heels of hot JOLTS and ADP employment data. I'd argue those are lagging indicators that will mostly be ignored by the Fed but the case for another 75 bps is certainly strong with inflation above 7%.
What's really moving the market though is the terminal rate. The May FOMC is now priced for 5.03% and that contrasts with the Fed's SEP, where dots show 4.6%.
More importantly though, every dot was below 5%, indicating that for even the hawks, there was no need to go above 5%.
By pricing a chance of 5.00-5.25%, the market is pricing in a hawkish shift in the SEP in December or hawkish comments from the Fed today. That will shift based on the ebb and flow of economic data but today's Fed decision and Powell's press conference will be the short-term driver.
Economists at Deutsche Bank believe that the Fed "will likely not pre-judge the outcome of the December meeting and will emphasise the data dependence of the decision, not least with another couple of CPI reports and jobs reports beforehand."
They expect Powell to leave open the prospects of another 75bp hike in December but without committing and coupling that with a case for downshifting the pace of hikes by early 2023 , if not sooner.
