For many months the market has anticipated a string of rate hikes from the Federal Reserve in order to battle inflation. At the same time, there have been growing concerns that the economy is slowing, and aggressive rate hikes may tip us into a recession. The market has been struggling for months as it has attempted to fully discount a hawkish Fed, higher inflation and a slowing economy.
It is anticipated that the Fed will raise rates by a half-point here on Wednesday and will start shrinking its $9 trillion balance sheet by not rolling over bonds and securities as they mature. There is some risk that the Fed could hike as much as 75 basis points and that it could accelerate the balance sheet shrinkage through active selling, but the chances of that happening are fairly remote.
This is a classic technical setup for a buy-the-bad-news response to the Fed. While that may seem a little too obvious to many traders that are trying to game the move, the market has a tendency to embrace the Fed when there is even a mild hint that it may be tempering its hawkishness.
Fed Chairman Jerome Powell is holding a press conference 30 minutes after the Fed interest rate announcement at 2 p.m. ET. Every word will be carefully considered and Powell's comments are very likely to create substantial swings in the market.
The logic of a number of market strategists has been that the market has been pricing in a series of rate hikes, and by the time they actually begin they already will be discounted almost in full. The problem is that the Fed's level of hawkishness is fluid, and if Jerome Powell ramps up expectations for even more rate hikes the market is going to struggle.
Be prepared for elevated volatility today. The market loves to love the Fed, but Jerome Powell needs to be a little less hawkish to get this market running again.