Fed Decision Hinges on September Guidance Amid 35% Rate Hike Odds
The Federal Reserve's upcoming decision has markets on edge, with futures implying a 35% chance of a rate hike and a hold remaining the base case. According to BNY's Geoff Yu, the market reaction will hinge on Kevin Warsh's guidance on September, as investors are already pricing in a strong chance of at least one hike by then.
Yu stresses that even a hawkish hold may offer limited relief, as expectations for future rate hikes are partly embedded. A surprise hike would be cross-asset bearish and could trigger a significant market reaction, while limited guidance from the Fed could prolong volatility.
The bigger risk is ambiguity, with Yu warning that if the Fed gives little guidance, rates and FX volatility could rise as investors wait for the next CPI and PCE releases to determine whether energy-driven inflation is broadening. Confirmation of a September hike would likely generate only a muted rise in yields, while limited guidance could prolong uncertainty.