Hike or no hike, do not expect a dovish FOMC

The long-awaited September FOMC meeting is finally upon us. The Fed is expected deliver a rate hike but package it in a dovish message. The dots are likely to show only one rate increase this year, signalling that the initial move will be followed by a long pause. Moreover, the statement should acknowledge that the labor market is nearing full employment but inflation risks are on the downside. Finally, Chair Yellen will underscore a gradual approach to policy normalization at her press conference. 

Admittedly, wobbly financial conditions represent a significant risk to the view as the Fed may choose to wait until the fog clears. However, if there is no hike, the accompanying message is expected to be somewhat hawkish, implying a strong possibility of an October lift-off.

Whether a rate hike is delivered next week or not, the dots - both the median and those representing FOMC core - are expected to continue to show one rate increase this year and four next year. This would be a hawkish outcome relative to market-implied expectations which currently show only 60% probability of a hike this year, and a total of three increases by the end of 2016. 

The only dovish scenario relative to market expectations would be a no-hike outcome with the majority of the dots moving to the 0-0.25% bucket for YE'15, essentially taking a rate hike for this year off the table. This is very unlikely. First, it would be difficult to justify postponing the lift-off by six months in the context of the cumulative improvement in the labor market. Second, it is believed that such a move could significantly undermine the public's confidence and thus prove counterproductive.