Jerome Powell confused cartoon

Given the prevailing market backdrop, nothing else will matter besides the Fed policy decision today. But I guess in that lieu, it means that how the market reacts or digests what the Fed will do is the most important driver of trading sentiment. As at the time of writing, the odds of a 25 bps rate hike are roughly 85% based on Fed fund futures.

There hasn't been any real leaks (not even from Timiraos) coming into today's decision and I would argue that it means policymakers are really tuning into broader market sentiment right up until it is time to make a call.

On the balance of things, the better market mood this week and the continued need to fight against inflation makes a 25 bps rate hike more likely. However, it isn't quite as straightforward as the rate decision today will also involve the Fed outlook via the infamous dot plots.

A more hawkish tilt in that sense could upset risk sentiment and that basically throws out the window the reasoning which even allows them to hike rates today. If anything else, it might very well come down to Powell's press conference to really try and push back against the perception that the Fed is going to break something again with the rate hike this month.

It's a real tightrope situation for the Fed in that sense.

Looking at the other side of the picture, they risk losing credibility if they instead refuse to raise interest rates this time around. Just less than a month ago, they have been adamant that they are not done in the fight against inflation. So, pausing or perhaps pivoting in that regard definitely sends the wrong message whichever way you want to look at it.

Sure, it may provide markets with some relief in the sense that the tightening cycle may be over. But the reason(s) for that shift in central bank thinking is not that comforting. It is either because the Fed has increased risks of financial instability and/or they have broken something and the economy is not going to like it down the road.

Taking that into consideration, it's not really about inflation if they do hit the pause button today. But if we do see price pressures fall off further in the months ahead, then it would just be pure dumb luck in favour of the Fed though.

Be that as it may, is that really a risk that the central bank is willing to take today? I guess we'll find out soon enough.

As for my personal take, I'm leaning more towards a 25 bps rate hike + lesser forward guidance + slightly higher dot plots + big pushback against any jitters (or at least an attempt) by Powell.