Market Nervously Awaits Fed's Decision Amidst Hawkish Speculations and Volatility Concerns

The Federal Reserve's meeting today has garnered significant attention from market participants, with focus shifting to whether an uptick in Core PCE inflation forecast for 2024, driven by recent data, will prompt a more hawkish stance reflected in the Fed dot plot. This potential adjustment, from three to two 25bps cuts for the year, could impact market sentiment and asset prices, contributing to recent volatility in rates and equities.

Market dynamics have shifted from an overly dovish stance, with less than three rate cuts priced in for 2024 compared to nearly seven cuts in January. Investors, particularly Nomura's Charlie McElligott, have noted a trend towards potential tightening, prompting adjustments in trading strategies to account for shifting expectations.

While the possibility of an upward revision in the dot plot remains, McElligott questions the rationale behind such a move, suggesting it could limit the Fed's flexibility and sow uncertainty in the market. Trading sentiment ahead of the meeting leans towards tactically positioning for a dovish outcome, anticipating steady rate projections despite recent data surprises.

As the FOMC meeting approaches, attention also turns to VIX expiration and its implications for market movements. Various scenarios, including a hawkish or dovish stance from Fed Chair Powell, are being considered, with potential outcomes affecting equity performance and volatility dynamics.

Overall, there's a sense of cautious optimism tempered by a recognition of potential downside risks, with market participants closely monitoring Fed actions and their impact on asset prices.