FOMC preview: Realized volatility to come

§ 01 Executive Snapshot

• What: The upcoming FOMC meeting under new chairman Kevin Warsh introduces heightened uncertainty in market expectations.
• Who: Kevin Warsh, the new Fed chairman, and Federal Reserve officials.
• Why it matters: Warsh's approach could lead to increased market volatility and uncertainty regarding future rate hikes, impacting investor sentiment and economic forecasts.

§ 02 Key Developments

• The market is pricing in a 36% chance of a rate hike at the upcoming FOMC meeting on Wednesday, equating to 9 basis points.
• For the next meeting on September 16, the market anticipates 27.7 basis points of hikes.
• By year-end, the expectation rises to 44.2 basis points, indicating a potential rate hike trajectory.

§ 03 Strategic Context

• Historically, Fed chairs have aimed to minimize market volatility by signaling rate changes in advance, a strategy that Warsh is now countering.
• The current economic landscape features an unprecedented capex boom in AI and data centers, complicating traditional inflation forecasts.

§ 04 Strategic Implications

• Immediate market consequences may include heightened volatility and uncertainty in response to the Fed's communication style and decisions.
• Long-term implications could involve a shift in how markets react to Fed guidance, potentially leading to a reassessment of risk assets and the dollar.

§ 05 Risks & Constraints

• A potential risk is the lack of explicit communication from the Fed, which could be interpreted as dovish and may weigh on the US dollar and yields.
• Competition from the evolving AI and data center boom presents a unique challenge for the Fed in forecasting inflation and economic stability.

§ 06 Watchlist / Forward Signals

• Key signals to watch include the Fed's decision on rate hikes and the subsequent press conference by Warsh, particularly regarding guidance for September.
• Market reactions to potential hikes or holds, especially without clear guidance, will be critical indicators of investor sentiment and volatility levels.