Scenario #4: No rate hike with hawkish comments and projections
Our final scenario is, in our view, the most likely outcome of tomorrow’s meeting. Here, the Fed acknowledges the recent financial market volatility and concerns about a global slowdown, but still maintains an optimistic outlook on the US economy. Beyond the obvious lack of a rate hike, the SEP would likely show a more positive view of the US economy, with most “dots” (individual Fed member expectations) still pointing to a rate increase by the end of the year.
When it comes to the markets, this is seemingly the expected scenario. While we would expect some short-term market movement here (likely selling of the greenback and modest strength in equities and bonds), the most notable feature of this scenario for traders may be the lack of major volatility. Therefore, we would expect the established market trends to quickly reassert themselves and stretch further over the coming weeks and months.
Regardless of the Federal Reserve decides tomorrow, it’s important to remember that the Fed is still the most hawkish of the world’s central banks. Whether it opts to raise interest rates in one day, one month, or one year, it will still likely beat its major rivals to the punch, so traders should be sure not to lose the proverbial “forest” (interest rates will eventually rise in the US) for the “trees” (the exact timing of that rate hike).