Markets Misprice Fed Meeting Uncertainty Ahead of Blackout Period

The markets are pricing in unusually high uncertainty around the September Federal Reserve meeting, according to TD Securities' analysis. The firm's Molly Brooks notes that rates markets are mispricing both a potential hold and a 25bp hike going into the blackout period.

The high uncertainty is reflected in the large deviations from past outcomes. Typically, there would be a +/- 7bp under or over-shooting for a hold, and +/- 9bp for a 25bp hike. However, Friday's pricing would lead to a 15bp deviation for a hold and a 10bp deviation for a hike.

The August CPI report is expected to drive significant repricing in rates and determine whether investors should fade current pricing or pay for a hike. Brooks argues that the current pricing implies historically large deviations, making this an opportunity to fade market pricing if the Fed holds.