Almost time to deliver the verdict
The dovish case, and this is what I think will happen, is that ultimately, the Fed won't have the confidence or perhaps the courage to hike because they're terrified that markets will kick and scream.
The World Bank, the IMF and G20 ministers have warned Fed officials that if they hike there will be consequences. The biggest danger is from emerging markets. Brazil and other parts of Latin America and are particularly strained at the moment. The fear from the World Bank tighter credit and volatility will spark capital outflows. That can easily become a negative feedback loop in those markets and ultimately that will end in tears as weak emerging market growth spills back into the US.
The right call is for the Fed to maintain its wait-and-see stance then strongly telegraph a hike ahead of the December or January meeting. Unfortunately, I don't think the Fed will be that dovish and risk trades are vulnerable if they aren't, including stocks and commodity currencies.
If I'm wrong and the Fed stays dovish, pile into stocks and commodity currencies, especially CAD and AUD.
What if the Fed decides to compromise
There are certainly FOMC members who want to hike right now and some who will argue strongly against it.
In the middle is a large group that wants to hike but have a sense that it's a risk. So what happens? Compromise. They could settle on hike with a message that no more hikes are coming soon or could vote to hold rates today and deliver a hawkish message about October.
Both are mistakes and the market reaction would be largely the same - risk aversion, stock market selling, yen strength, Canadian dollar weakness but to different degrees.
The decision is due at 2 pm ET
For more on the Fed
- FOMC: Time for sense or more excuses?
- Citi has 2 FX plays for trading the FOMC
- JPMorgan says the FOMC decision on Thursday is a coin flip
- RBC "holding out hope" that the Fed will hike this week. Goldmans still looking at December
- Goldman Sachs previews the Federal Reserve decision on Sept 17
- Five Federal Reserve scenarios from Credit Suisse
- Here are the real odds of a Fed hike on Sept 17
