I believe that the Fed will leave the door open for another rate hike today and that the FOMC will not hint at an end to the rate hikes until the increases actually end.If the Fed were to hint at an end to hikes before hand, any future rate hikes would be cannibalized by gains in the financial markets and thus rendered useless. For this reason, the end of hikes will be announced when the end has been reached and not signaled in advance. The key to today's statement might be any reference to the housing sector. The Fed certainly recognizes the importance that the markets are placing on housing and could well use it as a means of sending strong signals. Arguably, with the Fed likely to indicate "data dependency," there are no strong signals to send other than that future rate hikes will be data dependent. Another key might be any reference toward the lagged effect of past rate hikes or of "previous actions." A reference to either would be seen as indicating a forthcoming end to rate hikes, as the references would show that the Fed is cognizant that past hikes will soon have a greater impact on the economy than what has been seen so far. If there is a bias toward further rate hikes, it is likely to show that an end to rate hikes does not mean an end to tight policy. The Fed does not want the markets to price in the possibility of a rate cut because gains in the markets would be conducive to a strengthening of the economy, and the economy doesn't need any new stimulus. There could be important changes in the delivery of the policy statement given that former Fed Chairman Alan Greenspan penned the statements himself.
It's not easy to predict what Ben Bernanke will do, but given the perceived lack of clarity that followed his speech before the Economic Club of New York, Bernanke might be motivated to be a bit bold today. This doesn't mean he'll hold a press conference in the same way the head of the European Central Bank does, but who knows? The purpose of holding a two-day meeting instead of the one-day meeting that was planned likely was to discuss the Fed's communication strategy. Here are some "what if" scenarios: If there's a clear signal of an end to hikes: Financial conditions will loosen in the short run, via a rally in equities, Treasuries (steeper curve, though), tighter credit spreads and a weaker dollar. I believe that such a loosening of financial conditions will lead to a strengthening of the economy at a time it does not yet need new stimulus, because financial conditions are already loose. In turn, I believe the Fed would be forced to raise interest rates again in the coming months, spurring an eventual reversal of any moves tied to an end to rate hikes. That said, recent data show that the market is leery about being short ahead of the inevitable stoppage in rate hikes. This is abundantly clear in the Commodity Futures Trading Commission's most recent data on the positions of traders, where Friday the CFTC reported that large speculators closed a large number of short positions in 10-year note futures and are now record long. This positioning suggests that any rally could be more of an upside-down V than a U, particularly in terms of bond prices. If the FOMC indicates data dependency: Treasury yields will creep higher in anticipation of the possibility of a 5% funds rate (Treasury yields rarely trade below the funds rate unless a rate cut is imminent). This continued vigilance, combined with the implicit signal that data dependency suggests a relatively near end to rate hikes, is probably the best thing for equities. But a near-term jerk lower is possible over disappointment over the lack of an immediate declaration about an end to hikes.
If there's any mention of housing: This would either amplify the bond market's response or modify it, depending upon the context in which it is given. For example, if the Fed indicates that more rate hikes might be on the way, a reference to housing would likely result in sharp weakening in the bond market, as it would signal that the slowing housing market is no barrier to the Fed's desire to raise interest rates. This would be the same as the signal sent regarding the inverted yield curve wherein the Fed signaled it would not be a reason to stop raising interest rates. If there's any mention of the lagged effects of past rate hikes: Or any reference to "previous actions," this would be seen as a signal for a possible end to rate hikes, as it would signal that the Fed will soon want to idle itself and watch the effects of previous hikes. If there's any hint of the possibility of a 5% funds rate: This would likely force Treasury yields to move toward that level, fitting with my theme that "Treasury yields rarely trade below the fed funds rate unless a rate cut is imminent."