The main event in trading this week is the FOMC meeting and we will get the policy decision later today followed by Fed chair Powell's press conference. Fed fund futures show that odds of a 75 bps rate hike stand at ~75% and that outlines how the market is positioned going into the decision.
The rate hike itself may not be the main thing to watch though. Instead, traders will likely be more interested in how the Fed positions its views on the economy and balances that out against their resolve to beat inflation. I don't expect us to be in a spot where the central bank is looking to pivot yet as there will be more rate hikes to go in the months ahead.
In case you need a reminder, the Fed funds rate is now at 1.50% - 1.75% so another 75 bps rate hike will bring that to 2.25% - 2.50% with three more FOMC meetings to go through before year end. The terminal rate to the cycle is seen roughly around the 3.50% to 4.00% range but I'm inclined to think the former seems more likely given the circumstances.
The positive thing for the dollar is that the Fed's window to tighten isn't as narrow as other major central banks like the ECB and BOE. That affords some room to work with today and I would expect policymakers to make full use of that. But any subtle shifts in the dynamics may be all that is needed for stocks to run and the dollar to turn tail in the other direction. After all, a recession may not be the worst thing for risk trades.
Going back to the Fed, Adam posted a great preview yesterday here, in case you missed it.
