Why The Fed Might Sound Hawkish Today

The Federal Reserve is set to announce its latest monetary policy decision on Wednesday at 2:00 pm ET.

In a preview ahead of the Fed's announcement, Marc Chandler wrote that, "To the extent the FOMC meeting is ever routine, this should be it."

And so in short, the market isn't expecting much out of the Fed.

Right now, the Fed has indicated it could be appropriate to raise interest rates in June of this year. The market, in contrast, isn't pricing in a greater than 50% chance of rate hikes until the October 2015 meeting, according to data from CME Group.

And on Tuesday, Morgan Stanley said the Fed won't raise interest rates until March 2016.

But in a note ahead of Wednesday's meeting, Steve Englander at Citi said that the "hawkish bar" for the Fed is so low, it isn't hard to beat. What this means is that the market expects so few changes from the Fed, the risks are that almost anything the Fed does differently will be seen as "hawkish" or implying the Fed will act more quickly to raise rates.

Englander highlights these three risks for a "hawkish" read on the Fed's statement:

• A not-too-different statement is hawkish given how far market shave moved to the dovish side.
• The Fed and markets are reading low rates differently, with the Fed seeing stimulus and markets seeing disinflation.
• The Fed will stress unambiguous employment data over ambiguous price data.

Englander added: "So we are leaning to the market being surprised on the hawkish side, largely because market pricing has become so dovish. A recent round of client meetings suggests that most investors see the Fed as being patient for a very long time, so any firmness would qualify as a surprise on the anecdotal as well."

Market-based inflation expectations, or breakevens, have remained near multi-year lows as the tumbling price of oil weighs on inflation. And as this outlook remains depressed, the market has become convinced the Fed will keep rates near 0%.

There is no press conference on Wednesday, so the Fed's statement is all the market will have to go on. But because the market is so sure the Fed will say almost nothing and that rates will remain "lower for longer," markets remain sensitive to anything that changes this narrative.