Tomorrow the Fed will announce its next rate decision. If its 75 basis points as expected by many in the market, we will probably see little reaction, unless there are some trajectory changing comments in the post announcement press conference. If they do a full one percent that might change the market dynamics. The takeaway is that everyone does expect rates to go up—and by an amount that, prior to the past couple of months, would have been shockingly large.
Perhaps then no surprise that on Tuesday Wall Street ended lower as the eve of a U.S. Federal Reserve, in recognition of the FED’s aspiration to quash inflation, despite economic and market consequences.
One of the main drivers of continued inflation is expectations, which can become a self-fulfilling prophecy.
Expectations are very hawkish, and the Fed can come out just as expected and still be more dovish than expected. That may limit the market downside from this meeting and just may provide some upside going forward.
But then, earnings expectations are falling, and markets remain over-valued relative to the weaker economy, so that may pull markets further down. But I suspect the FED theatre will be a bit of a yawn. At least for now.
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