The 3 Ways the Fed Could “Play” the March Rate Hike and Dot Plot

Federal Reserve Chairman Jerome Powell

Stocks slipped slightly ahead of the Fed’s rate hike decision, which will arrive at 2 pm EST followed by Fed Chair Powell’s post-FOMC press conference half an hour later.

The Dow, S&P, and Nasdaq Composite all fell, but as most traders know, that could change in a hurry if the market likes what it hears this afternoon.

Analysts remained split on whether the Fed would actually raise rates after the recent banking crisis that required a series of private and government bailouts.

The CME Group’s FedWatch tool showed an 86% chance of a 25 basis point hike vs. a 14% probability of no hike. The market obviously expects a hike even though some analysts have predicted a pause.

“Pretty much every major and minor regional bank, throughout every region of the country, has gone down dramatically in the last week or so. I do think there’s a lot of contractionary things coming,” said Spouting Rock Management strategist Rhys Williams.

“Therefore, I think the Fed needs to be mindful of this risk, and look for continuing ways to probably help the economy as opposed to hurt it, over the next quarter or two.”

He continued, adding that the banking meltdown only accelerated a coming recession:

“I think that some of the inflation measures [and] money supply measures that we’re seeing were already suggesting that we were going to see we’re going to see a slowdown. I do think the inflation numbers will start to get noticeably better in the second half, no matter what the Fed does today.”

The Fed will also update its dot plot – a chart showing the Fed’s terminal rate for the year – this afternoon. Back in March 2020, the Fed opted not to provide one due to the pandemic. Powell & Co. could theoretically do that again today.

But taking that option could spark panic as the market wonders whether the banking crisis is a “Covid-like” moment.

The Fed could also reveal a terminal rate of 5.125%, which would hold rates steady if the Fed hikes by 25 basis points this afternoon, bringing the target rate up to 5.00%-5.25%.

The other alternative is a dot plot of 5.375% or above, which would indicate that at least another 25 basis point hike is on its way even if the Fed hikes this afternoon. This would be the worst-case scenario for bulls, but not necessarily hugely damaging if Powell frames it well in his post-hike press conference.

Make no mistake about it, Powell wants investors to believe that the Fed and Treasury have complete control over the banking situation.

If that jolts stocks lower again, so be it. We’ll find out the Fed’s decision soon enough.


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