The FOMC decides tonight, and the market has a 25bp hike all but priced. The more important release is the Summary of Economic Projections, which carries the updated dot plot. That shows how far this Fed thinks rates need to go in 2027 and 2028. If they adjust the dots in line or more aggressively than the current market pricing, it could confirm the market fear that a full rate hiking cycle is underway.
FOMC Tonality Changes Over Time
Our tonality score reads each meeting from the statement language, the vote split, the direction of the dot-plot shift and the press conference, on a scale from maximum dovish to maximum hawkish.
The shift since the start of this year is clear. The last three meetings of 2025 all scored dovish, every meeting since January has scored hawkish, and the last two meetings have pushed higher again.
Current Market Expectations of Rate Hikes in Each FOMC
The curve prices a 23bp move tonight, taking the effective rate to 3.86%. That means the market thinks a hike is all but certain. It is also unlikely the Fed wants to push back on that pricing, having reiterated its focus on price stability, and with Warsh explicitly placing weight on what the market is telling him.
SPY Returns (%) 1, 5, and 20 days after the FOMC
One day after each of the last four FOMC meetings, the reaction was negative or flat. Twenty days after, all four were positive, and the two largest are the biggest bars on the chart.
So a selloff on the announcement is very much on the table, especially if the dot plot lands more hawkish than expected, but the month after has repeatedly been the better trade.
There is also a version of tonight where Warsh delivers the hike and pushes back on the hawkish path at the same time. He can reiterate that he wants to see the longer-run data and the trend before committing to a prerequisite path.
That would be a “dovish hike”, taking some of the hawkish premium out of the front end. This would help equity pricing over the next month if front-end yields start to come down.
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Disclaimer
This newsletter is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities.
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