What the market expects from the Fed
We fully anticipate that the US Federal Reserve will announce a rate hike this month. If this is the case, the Fed will have skillfully succeeded in guiding market expectations toward its normalization scenario without any major hitches, albeit at the cost of a marginal increase in long-term rates. On the other hand, postponing the expected hike would send out a confused message to the markets and undoubtedly trigger a fresh surge in volatility.
The Federal Open Market Committee (FOMC) has actively prepared the markets for a hike in the fed funds rate.
The global growth outlook has been revised upward slightly, while market volatility remains at a low level
While the markets initially expressed a degree of skepticism toward the Fed's dot-plot chart (which reflects how the central bank expects it will shift interest rates), they now seem convinced and are pricing in an imminent hike, with implied probability of close to 100%.
Underlying trends in the jobs market and inflation rate have provided the Fed with a solid case for justifying future rate hikes. This has been reinforced by a favorable macroeconomic and financial backdrop: The global growth outlook has been revised upward slightly,
We expect the Fed will reiterate its resolution to continue normalizing monetary policy
while an increase in risk appetite has maintained market volatility at a low level.
In addition to the expected increase in the fed funds rate, the Fed's policy committee meeting should also provide the central bank with a platform to outline its latest macroeconomic forecasts and set the pace for further rate hikes. We expect the Fed will reiterate its resolution to continue normalizing monetary policy. However, it is too early to announce a reduction in the size of its balance sheet, which has now reached $4.5 trillion. The Fed probably plans to wait for the normalization process to advance further before doing so.