This is the real "data" that The Fed is "dependent" on...
As Deutsche Bank notes, The Fed is “right” to be raising rates. If they had done it earlier all the problems they now have to face, they wouldn’t have had to. If they do it later, those same problems will be even worse. Of course had they done it earlier there may well have been other problems. Like for example, no growth and a much higher unemployment rate. But that’s all water under the bridge. Fact is this Fed is ready to go. And markets know it!
But, what would it take for the Fed not to hike this coming meeting?
We think SPX through 1860.
Right through the 1900s, the Fed is likely to be complacent that this is normal market volatility. Pre-Prom nerves, if you will. It took the SPX just seven trading days to drop from 2102 to 1867 in August, an average of over 30 points a day. It could do the same but the pace would have to be closer to double. Possible but one wouldn’t make that a central forecast. More likely, the debate will quickly shift to how quickly the Fed stops tightening.
It appears, we have discussed previously, that the logic of the median dots is to raise rates to dampen a would be credit bubble (and 'disable' the record leverage that low risk premia have allowed). It’s hard to know how far rates have to rise for that outcome but we suspect it's more than one hike and less than what our adjusted Taylor rule model for terminal funds suggests, which is around 2.5 percent. Plus or minus 1 percent therefore seems a reasonable first proxy, which would have the Fed hiking say through to September, 2016.
And then what...
It looks like the market is already pricing in the next inevitable round of QE.