Tomorrow evening we get the latest US Fed meeting, where the FOMC will likely decide to raise interest rates again. However, since the last meeting, it’s clear that the US growth is slowing (as is the case globally). So we feel there are several points to look out for as the meeting kicks off.

Size of the hike

We think that there is a 75% chance of a 0.75% hike, with a 25% chance of 1%. Our thinking here is that 75bps is widely being discussed in the market, and would follow the move from the previous meeting. The upside risk is for a chunky 1% move, but we think the concerns around growth (see below) will stop the FOMC from fully committing to 1%.

In terms of a 50bps hike, we struggle to see this happening. It would throw the markets completely, and has not been signposted at all. This would be the most dovish scenario, that would send stocks flying and send the USD lower.

A 75bps hike should provide limited market reaction, given that it is largely priced in.

Growth expectations

This is where we think the real mover could be for stocks, bonds and FX. We think there is a risk that growth forecasts are downgraded. This could cause weakness in USD, but could actually support the stock market, depending on the commentary.

Lower growth would mean less rate hikes going forward, which would be good for stocks. Even though lower growth is bad for company financials, the immediate reaction is to discount the future hikes that are currently expected for later this year. So reducing this would be a positive in the short-term.

In the long-term though, lower growth would flip to being negative for stocks, but positive for USD as investors flock to it for safety. However, for the purposes of this piece we just want to focus on the meeting reaction.

Inflation forecasts

The final key point we are watching for is where the peak inflation will be. Since last month, commodity prices have fallen (eg oil) which could be the start of something. It’s too early to call, but we want to see what the Fed have to say about it.

The timeframes are important as further moves in monetary policy will be decided on with inflation as a key driver. So if the forecasts are highlighting the peak to be at the end of this year, then investors can plan accordingly and factor in lower inflation for 2023 (and possible rate cuts).

Clearly, it’s hard for the Fed to accurately call inflation going forward, but it’s ultimately their opinion that matters.

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