Below is the opening paragraph from today’s Bespoke Morning Lineup — our daily email alert that prepares traders, portfolio managers, and individual investors for the trading day.  You can learn more and see a sample of our popular Morning Lineup here.  Or, if you’d like to try it out for free — sign up for Bespoke Premium today and the first five days are on us.  Select the monthly or annual Bespoke Premium option at our Subscribe page to proceed.

Today is the first day with a real probability of an FOMC hike since 2006.  While the market is pricing something around a 20% chance of hiking, economists are evenly divided.  What makes it all the more fun is that we’ve seen nothing short of an avalanche of possible scenarios: increasing only the upper bound of the target rate, hiking but with extremely dovish language, declining to hike but with extremely hawkish language, raising the lower and upper bound for Fed Effective by 1/8 instead of 1/4 percentage points…the list goes on.  If the FOMC decides to raise rates, we’ll be tightly focused on operational details; will they raise the cap for the reverse repo facility that will be used to drain reserves? What will happen with interest on excess reserves?  Couching will also be very important, in terms of the language of the statement; the same is doubly true if they decline to hike.  But the bottom line is that nobody knows what’s about to happen, specifically. 

There are too many scenarios, and asset markets have been all over the place in the last few days as Treasury selling seems to indicate a pending hike, but EM and DM equity rallies point the other way.  Fed funds futures haven’t moved materially, despite huge changes at the front end of the Treasury yield curve in 12 month bill yields and 2 year note yields, which we covered in detail on Tuesday in The Closer.  We think the time is right for a hike from an economic and markets perspective, and doing so would remove a huge amount of uncertainty.  That said, we have no firm insight into what the FOMC will do, and our opinion on what it should do is basically irrelevant.  With so many market moves and scenarios floating around, we also can’t offer any insight into what will happen in the wake of a hike, or no hike!  What we can say is that any move that comes is likely to be driven more by positioning ex-ante than anything else.  Our suspicion is that means a rally in EM, credit, and equities and a lower USD on a hike, but our confidence there is very low.  Heading into the meeting this morning, Treasuries are rallying modestly, equity index futures are a touch lower, front month volatility futures are rising, credit spreads in CDS about flat, the USD is flat, and commodities are selling off…

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