The Fed Paints itself into a Rate-Hiking Corner

We now expect the Fed to raise rates this week, primarily to preserve credibility. The market has priced in a hike due to the Fed Chair's avoidance of forward guidance and hawkish pronouncements on inflation.

Despite a surge in oil prices and some strong economic data points, there's little evidence of accelerating labor costs or unanchored long-term inflation expectations. The underlying economy shows signs of slowing growth and moderating inflation.

However, the FOMC faces a difficult decision. A pause could damage credibility, while a hike might be premature given the economic backdrop. We anticipate only one more hike, if any, by year-end, supporting a longer-term dollar decline and favoring core fixed income, international equities, and alternatives.