Powell moses

The FOMC decision is tomorrow and the market is increasingly confident that officials will opt to lift rates by 75 basis points to a range of 1.50-1.75%.

The main reason is the surprise higher in Friday's consumer price index report. Prices rose 8.6% year-over-year compared to 8.3% expected. That set off a rout in bond and stock markets on the idea that the FOMC is behind the curve and will need to tighten the economy into a recession.

Yet it wasn't until late yesterday that the odds jumped definitively above 50%. Why?

A big reason is a pair of independent, yet curiously timed articles.

Two Fedwatchers: The Wall Street Journal's Nick Timiraos and CNBC's Steve Leisman released reports within hours of each other suggesting the Fed was looking at 75 bps.

A 75 basis point move is “a real distinct possibility,” Liesman said.

"A string of troubling inflation reports in recent days is likely to lead Federal Reserve officials to consider surprising markets with a larger-than-expected 0.75-percentage-point interest-rate increase at their meeting this week," Timiraos wrote.

In the Bernanke era and before, the Fed used signals like this to avoid surprising the market. In more recent times, signals like this have been rare but so have late FOMC pivots on policy.

Before the Fed went into lockdown, Powell seemed to take great pains to kill the idea of a 75 bps hike. He said the central bank would “strive to avoid adding uncertainty” and that it was not actively considering 75 bps. Many other Fed officials signaled the same, some in stronger terms.

The probabilities also reflect the possibility the Fed goes even further, hiking by 100 basis points. They could also make more-aggressive balance sheet moves, though that would be adding fuel to the fire of the bond rout.

Finally, the market will be keying on the terminal top for Fed funds and signals about it from the dot plot. In the most-recent release in March, the top was around 2.75%. The market now sees rates in the 3.75-4.00% range in February. The Fed could either endorse that or push back on it.

March 2022 dot plot