The Federal Reserve is facing pressure to raise interest rates at its policy meeting, with a 93% probability of a quarter-point hike according to the CME FedWatch Tool. This marks a notable change from just a month ago when the likelihood was only 33%.
The recent surge in inflation data, coupled with rising energy prices due to ongoing geopolitical tensions, is influencing market dynamics, particularly affecting the long end of the Treasury curve and contributing to declines in major U.S. stock indices. As bond yields rise, the 10-year Treasury note yield has reached its highest level since 2007.
JPMorgan outlines five potential scenarios for the Fed's decision and its implications for the stock market. A no-hike decision could lead to a 1.25% to 1.75% drop in the S&P 500, while a quarter-point hike without guidance might boost the index by 0.25% to 0.75%.
More aggressive actions, such as removing future rate cuts or suggesting a need for significantly higher rates, could lead to larger declines in the S&P 500, potentially ending the current bull market. The market's reaction will heavily depend on Fed Chair Kevin Warsh's communication during the press conference following the decision