Fed Rate Decision Countdown! JPMorgan Outlines 5 Scenarios — These 2 Are Least Likely

The Federal Reserve's (Fed) upcoming interest rate decision is drawing significant market attention as inflation remains elevated and oil prices surpass $100 per barrel. Market participants broadly anticipate a 25-basis-point rate hike. In a recent analysis, Jay Barry, JPMorgan's global head of interest rate strategy, laid out five possible scenarios, emphasizing that a 'no hike' outcome is highly unlikely. Instead, the Fed's post-hike policy signals will be the key driver for U.S. Treasury markets.

The Federal Open Market Committee (FOMC) will announce its decision at 2:00 AM Taiwan time on Thursday (November 17). Traders currently expect the Fed to raise the federal funds rate target range by 25 basis points to 3.75%–4.00%, with further hikes still possible in the coming months.

Since taking office, Fed Chair Kevin Warsh has consistently avoided providing clear forward guidance on future rate moves. However, persistently high inflation, oil prices exceeding $100 per barrel, and his repeated emphasis on price stability and financial market pricing signals have made the direction of this decision increasingly clear.

Scenario 1: No Hike Is Highly Unlikely

JPMorgan assesses the probability of the Fed holding rates steady this week as extremely low. Such a move would not only damage the Fed’s credibility but also undermine the hawkish signal sent during the July meeting.

If the Fed unexpectedly pauses, JPMorgan estimates that the one-year-ahead one-year OIS (overnight index swap) rate could fall by 25 basis points. Based on recent sensitivity of U.S. Treasury yields to policy expectations, the 2-year yield might decline by around 20 basis points.

Scenario 2: Hike Without Forward Guidance

In this scenario, the FOMC raises rates by 25 basis points to combat above-target inflation, but Chair Warsh refrains from offering any forward-looking policy guidance.

JPMorgan believes this would maintain some policy ambiguity, potentially leading to a modest decline in short-term rates.

Scenario 3: Hike and Withdrawal of 2025 Easing Expectations

This scenario is more hawkish. Given Warsh’s view that the labor market is at full employment, he may signal that the previously anticipated cumulative 75-basis-point 'risk management' rate cuts in 2025 are no longer necessary.

Such a signal could push market expectations for policy rates higher, with short-term rates temporarily pricing in an additional 75 basis points of hikes.

Scenario 4: Hike and Higher Neutral Rate Outlook

Here, Warsh acknowledges that current policy remains insufficiently restrictive and suggests that large-scale AI investments could boost productivity, leading to higher trend growth and a higher neutral policy rate (R*).

JPMorgan notes that markets have already partially priced in this possibility. The 1y1y OIS has returned near cycle highs, and long-term forward rate expectations have surpassed 2023 peaks—indicating growing acceptance of 'higher for longer' rates.

While neutral rate perceptions adjust gradually, JPMorgan expects limited impact on short-term rates but sees room for further upside in long-end forward rates.

Scenario 5: Hike and Pledge to Crush Inflation

The final and most aggressive scenario involves the Fed hiking rates while explicitly committing to rapidly bring inflation back to target, allowing markets to price in even higher terminal rates.

However, JPMorgan argues this hardline stance could paradoxically suppress long-end forward OIS rates, as markets may interpret it as the Fed prioritizing price stability over economic growth and labor markets, increasing recession risks.

Overall, Barry and his team do not assign specific probabilities to these five scenarios but clearly state that the two extremes—'no hike' and 'hike with crushing inflation rhetoric'—are less likely than the other three. This policy distribution could help support the 2-year U.S. Treasury yield.