The Fed is not hiking next week.  As previously mentioned, the odds of this are “zero,” without it actually being zero.  The trade I sent out Friday via email discusses a good way to play for this, with relatively little risk if the Fed actually does hike.  Get some on – it’s my favorite trade now, if you can get it slightly lower than Friday’s settle.

I thought I had a lot more to say about the Fed statement, but I really don’t have much to add from what I wrote last week:

The executive summary is that I lean bearish for the Fed meeting.  Employment and inflation have been firmer, the markets are more stable, and oil has recovered some.  There’s a chance that the “closely monitoring global economic and financial developments” phrase may be weakened, and there is a chance the “balance of risks” statement could be put back in.  It seems foolish to insert a new weaker balance of risks phrase (even if they believed it), so I think they just leave it out, or put back “balanced.”  These things all lean slightly bearish in my mind.  That January statement was the one that had the real potential for dovishness, and things look much better since then.

I don’t think a hawkish dissent is likely because George’s region of Kansas City is in contraction and Mester does not seem hawkish enough to dissent.  That leaves nobody else among the voters.[1]

As for the dots, my over/under for the number of 2016 hikes in the SEP is 2.6 (from 4 in the December SEP).  After they don’t hike next week, 1 quarter will be gone from 2016, so the “4 hikes in 2016” pace would imply 3 hikes.  We also seem to have some doves among the new faces.  But I think most reasonable people should shade that lower.  Considering a lot of the members use economic models to come up with a baseline estimate, and the data is close enough to the Fed’s GDP, unemployment and inflation projections, I don’t think the adjustment from 3 hikes will be that severe.

My over/under on the number of Fed hikes this year is around 2.25.  The markets think about 1.3.  If you were going to force me to name the most likely candidates for a hike, it would be (in order of likelihood): Dec, June and then Sep.  But all the meetings are non-zero.  The meetings that I think have the least chance of a hike are (in order): March (by A LOT), Nov (elections), and May (seems a little too soon).

I had previously mentioned the elections as a possible nudge towards the status quo in case of a close call.  What we are talking about is a HIKE, and it seems to me that Yellen, Fischer, Dudley, Brainard, and Tarullo are all Democrats.  Powell is the only Republican among the permanent voters.  If the Fed has to hike, they probably will, because the optics would be terrible.  It made the news last week that Brainard contributed three times to Clinton (a whopping $2.25K total) in the past few months.  If the optics were bad on a lousy $2K, the press and Republicans would go berserk if the economy looked like it needed a hike and the (Democratic) Fed skipped.  All other things being equal, the elections are going to set the hurdle on a hike a little higher, and I can’t imagine the Fed would feel the need to rush a hike at any meeting this year.

[1] I had to emphasize hawkish dissent this because it’s hard to predict what kind of asinine objection Bullard could come up with (a la his dissent last meeting on the Longer-Run Goals statement).

[But later in Trade section]

EDs have been drifting lower, and I suspect part of it is pricing in a less dovish (possibly hawkish) Fed statement.  It’s hard to say to what extent this is priced in to the market right now.  As we’ve seen with other recent central bank meetings, prior positioning and market expectations going into a meeting are at least as important as what comes out of the meeting.  We know that there is a somewhat large seller of Z7 and H8, but the rest of the curve is lagging behind.  When 2017 is only pricing in 33.5bps, I suppose this is understandable.  So these muddled thoughts are why I’m a little conflicted.