FOMC Meeting Brings Rate Hike Expectations to a Head

Today's FOMC meeting is expected to bring much-needed clarity on interest rates and inflation, but investors are bracing for a potentially hawkish turn. The US 10-year Treasury yield has crossed the closely watched 5% mark, with bond markets under intense pressure. A CNBC survey found that 76% of respondents expect a rate hike at this month's meeting, with 55% anticipating more than one hike this year.

CFA analyst Milton Berg argues that the Fed should keep rates unchanged rather than hike in response to rising Treasury yields and higher crude oil prices. He believes an oil-price shock doesn't necessarily signal accelerating monetary inflation, as higher energy costs reduce consumers' real disposable income and corporate purchasing power, creating a disinflationary effect elsewhere in the economy.

Markets are pricing in a 90% probability of a rate hike today, with roughly 100 basis points of total increases expected over the next 12 months. The real focus isn't the hike itself but whether it signals a hawkish start to a new hiking cycle or a one-off insurance move, a distinction that hinges on the Fed's updated dot plot and whether the decision is unanimous.

Fed Chair Kevin Warsh's opening statement will offer the clearest early signal of how much guidance he's willing to give. Tom Lee said a Fed rate hike would likely be met calmly by equity markets, agreeing the move looks more like the Fed ceding to market pressure than its preferred course.