75bp Hike is a Given, But Fed Could Still Surprise

A few weeks ago, expectations ramped up for the Fed to hike rates by 100bps at the conclusion of today's meeting.  That sentiment lasted only a few days before Fed speakers spoke up in unison in favor of a 75bp hike.  Weaker economic data since then has removed all doubt.  All that to say the hike itself will not be news today.  Rather, it will be the framing of the Fed's reaction function going forward.  The recently weak econ data gives Powell a chance to remind the market that inflation is a more relevant concern than recession. 

Indeed, the market may have been having its own thoughts along those lines based on mid-2023 Fed Funds Futures, which have been creeping back up very steadily over the past few days (green line below).

On a more upbeat note, this hike also puts the Fed in a rate range that is close enough to "neutral" to open discussion about hitting a terminal rate in the next meeting or two.  Remember, the neutral rate is the one that neither promotes expansion or contraction, and/or the one that results in stable 2% inflation.  The terminal rate is a bit higher in the current case, and simply refers to the rate at which the Fed stops hiking.  

Several Fed speakers mentioned the possibility of the Fed Funds Rate being close to neutral after today's meeting.  Powell can go a step further and address the extent to which the committee sees the need to pursue a substantially higher terminal rate in light of its assessment of inflation and data.  Whatever the case, expect Powell to fall back on the "data dependent" stance when it comes to the outlook.  There are a few different ways he could communicate that, however, and those variations coincide with today's potential volatility.  The more he says "we don't care about the economy if inflation is still moving up," the more we could see brief, but sharp upward movement in rates.  The more he says "we're seeing more and more signs of inflation turning a corner and we think we're getting very close to a terminal rate after this hike," the more we could see the big technical floors in bonds get obliterated.