3 Scenarios We See Happening Ahead Of This Wednesday's Feds Rate Decision & Powell's Language

Market fully pricing in and expect a 25bps Rate Hike this week and we do believe this will be the case on Wednesday. SPDR S&P500 SPY

From there, the market will gauge the Language of the statement and of course tone of Papa J. Powell...

a) Will this be a dovish hike, meaning they will back off on the language of "two additional rate hikes" that Powell did reaffirm at the economic forum earlier this month. In this scenario, we see $SPY retest 456 possibly a new 52 week H. 55% Probability. $SPX rise .5%. 

b) Knowing feds don't want to be caught off guard in case a spike in summer CPI PCE readings, we can also argue that the same language from prior meeting will be carried over. In this case, a hawkish hike. Language would include "Higher, longer," "Additional firming policy," andor "Inflation remains way too high." (Even though latest headline CPI has dropped to record low 3.0 not seen since more than 2 years ago.) In this scenario, we see $SPY dropping below 443 conveniently filling a gap. 35% Probability. $SPX drops .75% - 1%. 

c) Given PCE data coming out also on Friday of this week, and Cleveland Nowcast shows estimate of 3.41% and it's also likely FOMC members will have this number already as they start their meeting...

Last month reading PCE (Personal Consumption Expenditures (PCE) includes a measure of consumer spending on goods and services among households in the U.S) was a surprise 3.8% YOY well below 4.6% YOY street expectation. If you remember that day on June 30, markets gaped up to 441 from 438 day prior closing. Given this backdrop, we feel there is a slim 10% probability that the FOMC signals the END of Rate Hiking Cycle along with the usual defensive/peculiar language. In this scenario, $SPX rises 1% - 1.5%.

Below data for September meeting shows traders on the side of another pause in that meeting.

To conclude:

The end of interest rate hikes is often accompanied by a shift in monetary policy towards a more accommodative stance, aiming to support economic expansion and encourage borrowing and investment. Decisions to cease interest rate hikes are carefully considered based on comprehensive economic indicators and forecasts. While this approach fosters a delicate balancing act, it plays a vital role in shaping the financial landscape and guiding economies toward sustained growth.