It’s always really tough to predict one equilibrium over another as the outcome in a multi-equilibrium game, because the decision-making dynamic is solely driven by characteristics internal to the group, meaning that there is ZERO predictive value in our evaluations of external characteristics like Taylor Rule inputs in 2016 or US/Soviet nuclear arsenals in 1962. (I wrote about this at length in the context of games of Chicken, like Germany vs. Greece or the Fed vs. the PBOC, in the note “Inherent Vice”). But my sense — and it’s only a sense — is that the “Hike today and then delay” equilibrium is a more likely outcome of the September meeting than “No hike today and then no more delay”. Why? Because it’s the position both a hawk like Fischer and a dove like Bullard, both of whom are high-reputation members, would clearly prefer. If one of these guys stakes out this position early in the meeting, such that “Hike today and then delay” is the first mover in establishing a “gravitational pull” on other members, I think it sticks. Or at least that’s how I would play the game, if I were Fischer or Bullard.

Eoin Treacy's view

This represents an interesting perspective on the bureaucratic and institutional psychology of the Fed. Considering how much political capital has been expended on pursuing extraordinary monetary policy the decision to hike rates is a major endeavour on all fronts. 

The 12-month yield has probably rallied about as much as practicable over the last couple of months and is now testing the progression of lower rally highs. Considering the market is waiting with baited breadth on the Fed’s announcement it appears likely that yields are going to now consolidate. 

US 10-year yields have completely unwound the overextension relative to the trend mean while a sustained move above it would be required to signal medium-term supply dominance.