And finally, the day of the FOMC meeting arrived. Over the past few meetings, the Fed has been raising rates at the fastest pace in decades, but even so, the market is speculating about the possibility of a 100 bp rate hike, so the 75 bp scenario may even lead to a rebound in risk assets, albeit a short and shallow one. Attention will also be on the dot plot, as market expectations for the terminal rate (at which the Fed will say “stop”) now fully justify the sell-off in the bond market. Raising the rate by 75 bp will bring it to an effective value of 3.08%, but the yield of two-year bonds is already 4%, so the interest rate will have to continue to be raised, and more than once.

Starting from the end of last week, the market has been pricing in a 100 bp outcome and equity market buyers were rather reluctant to object to this. The S&P 500 tested levels below 3900 earlier this week; the fall below 3850 met with little buying interest yesterday and the indices closed in the red, while the dollar climbed to yearly highs (110.50 on the DXY index). Despite significant acceleration in US core inflation in August (from 5.9% to 6.3%), other indicators of inflation, such as firms' plans to raise prices or inflation expectations of the households, showed positive dynamics, and therefore the need for a 100 bp hike does not seem so urgent. Instead, a scenario where the Fed acts in line with current market consensus but maintains a significant hawkish bias in policy seems reasonable: at least one more 75bp increase and then slowing the pace of tightening to 50bp.

Dot Plot will be an important source of information about the future intentions of the Central Bank, but it must be remembered that the Fed's forecasts change over time, so the medium and long-term forecasts are likely to be adjusted more than once in order to incorporate incoming economic data. Officials' median rate forecast for the end of 2022 is likely to be above 4%, and the Fed will likely expect to keep rates at that level throughout 2023. The Fed will probably keep the long-term neutral rate at 2.5%, which means that the rate hike today will send it into restrictive territory.

To assess the possible behavior of the market after the Fed meeting, it is worth considering that in 8 of the last 10 FOMC meetings, the market reaction to the outcome of the meeting was bullish. In January, March and June, the markets rose after the FOMC by 6-9%:

Therefore, shorting the market when asset prices factor in super-hawkish expectations seems too risky.

Today, an old bearish factor came to the market radar that significantly influenced the demand for risk in the first half of the year - geopolitical tensions. Russian President Vladimir Putin announced a partial mobilization, which marked a new round of tension in the confrontation between the West and the Russian Federation. European currencies dropped to this year’s lows, the EURUSD is testing 0.99 and a bearish breakdown at the level of 1.13 is brewing for the GBPUSD. In turn, the dollar index jumped to a new high, and investors may have a strong bullish bias on the greenback as the safe haven factor comes back to the spotlight. The target for the dollar index is the level of 111: