Federal Reserve interest rate decisions are always significant events for the market, but the one here on Wednesday is going to have more impact than usual.
It is expected that Fed Chairman Jerome Powell and his cohorts will hike rates by 75 basis points, but there is some debate that they could hike a full percentage point to convince the market how seriously it is taking its battle against inflation.
Aggressive action is already well-anticipated, but the most important issue today will be whether there will be any hints about how policy is already slowing the economy and having an impact on inflation. The market is desperate for clues about a pivot by the Fed to a more dovish stance that will allow the market to better discount higher rates.
Unfortunately, Powell made it quite clear in his Jackson Hole speech that he doesn't want to give the market hope. The Fed was very unhappy about the big market rally in July and August that was driven mostly by false hopes of a dovish pivot. Powell is likely to forgo any hints about longer-term plans and will reiterate that the Fed is data-dependent and will make decisions on a meeting-by-meeting basis.
Over the past decade, the market has grown accustomed to a Fed that showed concern about the market reaction, and there is still an inclination to celebrate the Fed no matter what it might do. However, there is now a major shift and the Fed views a positive market as a negative in its battle against inflation. A market that is trending higher is going to make it harder for the Fed to accomplish its goal of quashing inflation.
Technical conditions are good for a positive response to the Fed, but it may be very short-lived or come from lower levels. The charts suggest that a retest of the June lows is coming, but there could be a brief pause while the market digests the Fed decision and realizes that even more rate hikes are coming and the economy is going to keep slowing.
We have a mild start on tap here on Wednesday, but watch for volatility to increase sharply when the Fed decision is released at 2 p.m. ET.