Whose opinion matters more: yours or the market's

The set-up to today's Fed meeting is a fascinating one, and not just because of the binary nature of the event. No, in many ways it's the psychology around today's announcement that is truly fascinating.

Most observers would agree that the 2018 dot plot will receive the lion's share of attention at 2 p.m. today, though one can of course quibble whether that means 51% or 75%. It also seems as if the result is a fairly binary affair: the median either shifts to four dots or it remains at three.

Beyond the micro term when algos shift things based on headlines, what ultimately matters for market pricing is what happens relative to market expectation. And here's where things get tricky.

It seems as if many people who have studied the dot plot have reached the same conclusion as me: namely, that it's likely that the 2018 median remains at three hikes. After all, getting four of the five remaining "three dotters" to raise their policy projections seems like a big ask.

Yet if you ask this same cohort what they think the market believes, many would say four hikes. The upshot is that a three-hike median in 2018 would be dovish to everyone but themselves.

Yet if people actually believe that three hikes is the most likely outcome, would it actually be a surprise to anyone but an algo? To some degree, yes (insofar as the probability of a shift to four hikes is clearly greater than zero), but perhaps only very modestly so.

This is one of those scenarios where it's very easy to get yourself tied up in knots doing second-, third-, and fourth-order analysis. The more I think about it, the more it strikes me that trading immediately after the release may be a bad idea unless you are a) faster than anyone else, or b) have a VERY strong view about what's in the price.

Source: Bloomberg Pro Terminal

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