Fed fund futures currently show a ~97% probability of the Fed choosing the latter, so that is the key risk in terms of market pricing going into the main event later today.
At this point, you have to ask what exactly defines the Fed’s credibility when it comes to making a decision today? The market has made up its mind that the Fed is well behind the curve and needs to do more to catch up. It is essentially bullying Powell & co. into a 75 bps rate hike, but is that really the most credible move?
I’m afraid, on the balance of things, it actually is. The thing with that is that it sets up more aggressive tightening expectations in the subsequent meetings and that will be tough for the Fed to square without more kicking and screaming like what we have seen in the past few days.
Given pricing odds, equities and bonds will catch a reprieve if the Fed sticks with 50 bps (the dollar should retreat as well). However, after some time settle down, I fear we could return back to this same debate especially if inflation pressures continue to mount in the US. The market believes the Fed is behind the curve and needs to act, and I reckon policymakers will have to try and heed that call eventually or otherwise risk another “policy mistake” – at least in the eyes of market participants.