Here we are, the last FOMC meeting of the year. According to the latest Bloomberg survey, the Federal Reserve is expected to lift short-term interest rates by another 25bps - which would bring the target band up to 2.25%-2.50% - to the highest level since March 2008. The chances that Jerome Powell would stand idle today are very thin as the Fed had already widely communicate on a December hike. Backpedalling would send a terrible signal to investors as it would suggest that the US economy could not withstand another rate hike.
Therefore, we expect that the Federal Reserve would come with a dovish hike. During the press conference, Jerome Powell would provide little guidance and emphasize the need for optionality. In other words, the Fed would not commit to any further tightening move and stick to a data-dependent approach.
The big question now is how will the market react? Both the financial and economic backdrops, as well as the huge amount of private and public debts, have made investors less and less confident regarding further increase of borrowing costs. Jerome Powell will therefore have the difficult task to deliver a dovish hike, while remaining at the same time positive about the economic outlook. It promises to be an interesting day in both the equity and FX market. On Wednesday morning, the greenback was trading lower against most of its peers at traders brace for impact, while global equities were grinding higher, suggesting that the Fed would indeed switch to a more dovish stance.
