It's hard to think of too many other Fed announcements with more potential volatility than today's. 4 short business days ago, the market knew exactly how much the Fed would hike and we had a very good idea of what the Fed would generally say. Then last Friday's CPI came along and scattered all of the carefully placed pieces on the bond market's war room map. Now the Fed may hike 75bps instead of 50bp. Some nutty talking heads are calling for 100bps (operative word being "calling," because anyone actually predicting that it happens today is--well... they're just wrong). In fact, even 75bps, which is almost fully priced in based on Fed Funds Futures is not a foregone conclusion. The Fed has options, and they can create several very different takeaways depending on how they use them.
The first option is whether to hike 50 or 75bps. Is this really an option? After all, the market has priced in a 100% chance of 75bp hike and a very small chance of a 100bp hike.
This is silly. There's less than a zero percent chance of a 100bp hike (I know... that math doesn't make sense, but it's new math...) Also, although a 75bp hike is probably slightly more likely than a 50bp hike, the market will likely be surprised to learn just how viable the 50bp hike was when we finally have a chance to review the Fed's full transcript 5 years from now. In fact, they may even divulge that discussion in the Minutes 3 weeks from now, OR perhaps even in today's press conference.
Point being, the Fed previously said 75 wasn't on the table unless inflation changed in a major way, and it's debatable that one single hotter-than-expected CPI report constitutes a major change. The Fed may characterize that as the final death roll of hyperinflation based on a preponderance of other data and economic deceleration that suggests a corner has indeed been turned. In this way, the Fed could deliver a stealthily dovish message, even while hiking 75bps or an overtly dovish one by hiking only 50bps.
Assigning probability to the hike options is less important than simply understanding there are options, and that some traders still think 50 is on the table, even though futures traders do not.
Beyond the hike, the dot plot is extremely relevant, as is the post-meeting press conference with Powell. In fact, the realization of a 50bp vs 75bp rate hike is probably much less important than the dots and the press conference this week. That said, a 50bp hike would certainly lead to a major reaction at 2pm, especially if accompanied by dovish dots. Some people are concerned that the market would freak out in that case, with the thesis being that the Fed has its head in the sand regarding its duty to fight inflation. If I were Powell in that case, I'd say "yo... look how much the market has already done to do our job for us. Policy communications have already turned the housing market on a dime and crushed equities valuations. The ball is definitely rolling based on our 50bp hike outlook. We're trying to engineer a soft landing, not a crash landing. Get back to work and stop freaking out."
At this point the biggest argument for a 75bp hike is that the market has priced it in, so the Fed can walk through that open door if it wants. If it does, the best case scenario would be to make that a "dovish 75" accompanied by a press conference that says 75bps get them up to a point where rates will level off sooner, and one that decreases the odds of similarly-sized rate hikes in the future.
Bottom line: the Fed already under-reacted in a ridiculously huge way when it came to the risks of rising inflation. There's no sense in overdoing it in a big way on rate hikes when disinflationary balls may already be rolling.