On the surface, the market offers plenty of chaos: bank runs, bailouts, inflation, bloated balance sheets, a looming fiscal cliff. But behind the chaos is a certain order.
The irony of all this with the US banks is that historically it's a recession that drives trouble for the banks. This time it's the banks holding of risk free bonds that could lead to the recession.
Is Powell in a no-win situation? A pause would suggest a lack of confidence in the system, a 25 bp hike would add further pressure to said system, and 50bps could lead to panic.
With rate hike odds as of this writing at 88% of a 25 bps hike we know the market is betting that the Fed is most afraid of inflation and secondarily concerned with the US banking system which Powell will certainly tell us how resilient it is at the press conference. The theme of the press conference could be that the Price stability doesn't conflict with financial stability
And to the worry that if the Fed doesn't hike today, they must know something that the market does not and if they are worried, the rest of us should be.(Powell has a press conference so he can explain)
We'll get the updated dot plot during today's FOMC announcement. If the dot plot is revised lower, that will show that the Fed has truly blinked and is on the path to reversing it's stance on 'higher for longer' - if stable/higher, there's lots of room for the market to reprice.
Base case
1. 25 bp hike
2. Future course - politically correct stance of being Data dependent however with a hawkish undertone - (we are yet to break anything significant)
3. Dot Plot similar to Dec 22
4. Press conference can continue to state that they have different tool kit for Financial stability .