During the trading session Tuesday, the market was pricing in a 15% chance the Fed raises rates Wednesday. Therefore, if the Fed announces a rate hike, the initial market reaction could be sharp and even exhibit characteristics of widespread panic.
91% Of Primary Dealers In No Hike Camp
According to Bloomberg, 21 of 23 primary dealers are forecasting a “no hike” outcome at 2:00 pm ET Wednesday. These figures also tell us if the Fed hikes, significant volatility may follow in a wide variety of asset classes.
An Insider’s Take
The Wall Street Journal’s Jon Hilsenrath has been covering the Fed for years. Hilsenrath’s take on this week’s meeting aligns with the markets:
“Federal Reserve officials, lacking a strong consensus for action a week before their next policy meeting, are leaning toward waiting until late in the year before raising short-term interest rates. It is a close call. But with inflation holding below the Fed’s 2% target and the unemployment rate little changed in recent months, senior officials feel little sense of urgency about moving and an inclination toward delay, according to their public comments and recent interviews.”
Our Approach Will Remain The Same
If the Fed raises rates and the markets react in a violent manner, it will not alter our approach in any way. We will make decisions based on hard data and facts. If the hard data says “do nothing”, we will ride out the volatility. If/when the math hits “volatility to respect” thresholds, we will take action as needed.
It is possible a surprise rate hike could induce a selloff similar to the plunge following the Brexit referendum. The Brexit selloff lasted two days and was quickly retraced via a sharp rally in the other direction. A “sell first ask questions later” reaction remains the lower probability outcome. However, the odds of a surprise rate hike are not zero. It is prudent to be prepared for all outcomes.