Tomorrow concludes the penultimate meeting of the Fed for this year, with a pretty clear expectation of no policy change. But investors are likely to be very keenly looking for hints about what will happen in December, as a final rate hike hangs in the balance.

A couple of weeks ago, Fed Chair Jerome Powell gave a speech at the Economic Club of New York. That was significant, because most of the titans of tech and industry were in attendance. Traditionally, it’s a venue for the head of the central bank to communicate where interest rate policy is likely heading. And, in his speech, Powell essentially said that there wouldn’t be a rate hike at the upcoming meeting.

Looking to the Future

Not surprisingly, after the guidance from Powell, over 98% of traders are expecting there won’t be a rate hike this time around. The little over 1% of dissenters are sticking to the chance of a quarter-point of tightening. Therefore, the main focus of the rate decision is on what comes after, specifically whether or not there will be any signals about a final rate hike in December.

The Fed and the markets are still at odds about that particular point. In his last speech before the rate decision, Powell insisted that a final rate hike was still on the table. The last survey of FOMC members back in September showed that they expected another rate hike by the end of the year. Since December is the last meeting, then that means time is running out for that hike.

Fighting Against the Market

Meanwhile, nearly 70% of traders expect that there won’t be a rate hike in December. Money markets are pricing in a small chance, as well. So, if the Fed comes out strongly for the possibility of a hike, then yields could get a boost, along with the dollar. Given the concerns over the lack of liquidity of late, that could also send stocks lower.

What markets are likely hoping for is that the Fed will admit that the final hike won’t be needed, and rates will stay at this level for a long time. That might end up weakening the dollar a bit, but yields could keep rising for reasons outside of the Fed. After all, the central bank is still pulling $90B out of the market each month, and the US Treasury still needs to cover a nearly $2T deficit by borrowing.

The Dollar to Keep Strong?

The other risk event on the radar for Wednesday is the return of the House from a short recess, in which the new Speaker will lay out spending plans. The government is currently funded through a “continuing resolution” that expires on November 17th, after Congress failed to pass a budget at the end of September.

That fight could start anew, with the first set of spending bills going through on Wednesday as a test of the new leadership. If there is trouble on Capitol Hill, investors might start worrying about another instance of the US government coming down to the wire on a budget debate. Somewhat counterintuitively, that could see the dollar gaining strength as yields rise in a global context where most central banks are pausing out of fear of hurting their economies.

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