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The Federal Reserve will meet on Wednesday, March 22, to set interest rates.

There are three things to watch from that meeting.

First, whether the Fed will raise interest rates or not and by 25 basis points, 50 basis points, or not at all.

Second, we will get the first update of the Dot Plot since the December 14 meeting that projects what Fed officials think interest rates, inflation, unemployment, and GDP growth will be at the end of 2023 and 2024.

Third, the financial market reaction to the news out of the meeting will tell us if the Fed (as I’d argue) has lost control of the interest rate narrative and that the bond market is now calling the direction and pace of changes in interest rates.

To sketch in each of these “things” quickly.

First, the Fed’s move on interest rates. On Friday, March 17, the CME Fed Watch Tool put the odds of no action at 41% and for a 25 basis point move at 59%. A 50 basis point move had no takers in the Fed Funds Futures market. This was quite a switch from the day before when only 20.1% odds went to no change and 79.7% were looking for a 25 basis point move. The turmoil in the global banking sector–which Wall Street economists project will take 0.5 or a full 1.0 percentage point off U.S. GDP growth in the second half of 2023–has led the financial markets to a belief that the Fed will hold off on any further interest rate increases until, at the least, it sees what the extent of the economic damage is. No point in raising rates to combat inflation by slowing the economy if the banking crisis has already knocked back growth. My own opinion is that the Fed will opt for 25 basis points just to signal that it isn’t necessarily done with fighting inflation.

Second, those Dot Plot projections. I think the projections will show that the Fed sees inflation as stickier than in December, interest rates peaking higher in 2023 (with no cuts forecast in 2023 in the projections), and that the economy will slow in the remainder of 2023 but avoid a recession. The stock market consensus right now remains that a belief that the Fed will end its rate increases with the May meeting and that it will cut rates by 100 basis points in the second half of 2023. A clear refutation of that view from the Fed would hit markets hard, but I don’t expect clarity from the Fed in the current very uncertain financial situation. I think the Fed will be sufficiently vague so that the stock market can continue to believe in the current consensus.

Third, the financial market reaction. I think that actual news from the banking crisis and a decision by bond investors and traders to buy Treasuries as a safe haven or to push interest rates higher across the board on fears of a wider contagion will set the direction and pace for interest rates no matter what the Fed says on March 22. This could produce an “interesting” split in market reactions with the stock market remaining in its What Me Worry mode. The VIX fear index is still at very low levels and the index moved very little with the week from 26.52 on March 13 to a close at 25.51 on Friday. Much of the 10.96% jump in the VIX on Friday, I’d argue was a result of traders hedging risk ahead of the weekend. Certainly, this index doesn’t show a leap in fear among stock market investors. On the other hand, the bond market moved strongly to discount risk with the yield on the 10-year Treasury falling to 3.43% on Friday from 3.55% on March 16. A week earlier, on March 9, the 10-year yield had been 3.84%. (Remember that when yields rise it means that bond prices are falling.) The move was even stronger on the shorter end of the yield curve with the yield on the 12-month Treasury falling to 4.13% on March 17 from 5.04% on March 9. In a market as big and relatively slow-moving as the Treasury market, these count as big shifts. So while the stock market remained relatively unworried, the bond market showed a big safe-haven move. One of these two markets is wrong (and I wouldn’t vote against the bond market in this situation.) A difference of opinion like this usually doesn’t last for very long.