By Thursday global markets would be reacting to the Federal Reserve policy announcement that would be one of the most anticipated ones in recent times. Within the last month, the Fed Rate markets have increased the probability of a 0.25% hike to 98.6% from 67.7% on 30th December. During the same period global equity and bond prices have increased by 6% and 3% respectively.
It has led to a very unique situation that boosts the market's confidence of a 0.25% hike. It has been driven by the previous three inflation releases that have been decreasing on monthly basis. But the Fed might be looking at the bigger picture as the inflation still stands above 6%.
Even more importantly it would be aware that the main factor for decreasing inflation has been Gasoline prices. That might have already bottomed out in December as the prices have increased by 10.67% within January.
Factoring in all these components along with the upside risk from China reopening. It would be very risky for Fed to reduce the rate hike as the meeting takes place before the January inflation data release.
This makes the policy most divided within and outside the Federal Reserve since the rate hike cycle began in March 2022.