Welcome To The Rate Hike Heard Around The World

Talking Points:

– The Federal Reserve’s long-awaited meeting is here: The bank is finally expected to hike rates at this afternoon’s meeting. The statement is released at 2:00 PM ET, followed by the presser at 2:30.

– Given that this hike is largely expected, it’s rationale to expect that it’s mostly priced-in right now. But the peripherals of today’s meeting will likely determine price action trajectory. If the Fed takes a dovish approach towards inflation expectations or the dot-plot matrix, we could see USD-weakness even though the bank hiked.

– This is one of the biggest news events in years. The world has never seen what happens after rates move up after six years of global stimulus. Neo-Keynesian economics is about to face its toughest test yet. So, be careful. If you don’t know what to do for today’s news announcement, now is a good time to work on that approach. To that end, we have the 360° course as well as our Traits of Successful Traders research series. These could certainly be nice additions to the approach.

The long-awaited Federal Reserve meeting is finally here. We’ve seen this discussed in financial media for much of this year, and for a while there, it really looked like we might have to wait until 2016 or 2017 for that first hike in 9 years; but alas, we are here, and most economists/analysts are going into this Federal Reserve meeting with the full expectation that we’re going to finally see a hike.

It’s all About the Dots

It’s the surrounding details around this afternoon’s meeting that will likely shape price action moving forward. And since today’s hike is largely a foregone conclusion that’s likely already priced-in to many markets, the next obvious focus becomes the Fed’s Dot Plot Matrix. This is the chart in which each Fed member can voice their opinion on where interest rates will be in coming years. For much of this year, these dots (Fed expectations) have remained quite divorced from market expectations, with the Federal Reserve expecting four hikes next year. Markets are currently pricing in two. Given the pandemonium that we’ve seen around the world this year around ONE rate hike, expecting four may seem to be a little on the aggressive side.

So, the dot plot matrix becomes the initial focus after a rate hike because this sets the stage for the Fed’s stance going into 2016. Should the Dots happen to fall (Fed members expectations for higher rates moves lower), this could be perceived by the market as a ‘Dovish Hike,’ not too different from the ‘hawkish hold’ that we had back at the September Fed meeting when the bank backed off of that long-awaited decision.Under this scenario, we could see stocks and risk assets move higher initially as Fed expectations merge more towards market expectations with a softer stance towards 2016 rate hike trajectory. The biggest takeaway from this development would likely be seen in weakness in the Dollar. While the market is only expecting two rate hikes next year, the fact that the Fed has continued to hold on to this ‘four-hike’ theme has kept bullish bets in the Greenback. If the dot plot matrix moves lower, we’ll likely see some of those USD-bets come out of the market, and that could lead to USD-weakness.