The banking crisis isn't making the FOMC job easier. Tighter financial conditions are what is needed to fight inflation. At the same time the Fed doesn't want to have to deal with a collapse of the banking system. Which means they need to be even more careful than usual.
That being said whether they decide on a rate hike or something else today, what really matters is the forward guidance the FOMC will give.
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Forward guidance
The scenarios
Today the FOMC will decide to do one of four things:
Raise the Fed Funds rate by more than 25bps (not super likely).
Raise the Fed Funds rate by 25bps (likely, priced in).
Keep the Fed Funds rate where it is (possible, not priced in).
Cut the Fed Funds rate (very unlikely).
Because inflation remains the main problem facing the US economy and because not continuing on the path they set last month would be seen as a sign that the banking system is really on the verge of collapse, it seems most likely they'll go with option (2).
And option (2) is already what the market is pricing in anyway, as of yesterday the Fed Funds rate futures gave:
89% chance of 25bps hike.
11% chance of pause.
So the FOMC has nothing to win by “surprising” the market with a pause today.
I'm writing this newsletter in the early morning on Wednesday so we'll only know for sure in a few hours.
But the most important information we'll get today isn't the decision about the Fed Funds rate. The most important information is what kind of projections the FOMC is making for the months to come and what message Jay Powell will emphasize in his press conference.
As per the most recent dot plot the Fed was planning one or two more rate hikes this year. Comparing this to the new upcoming dot plot is the key to evaluate at what stage of QT we are.
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