Traders Who Bet on Friendlier Fed Are About to See If They're Right

The biggest stock-bond rally in more than two decades has just raised the ante for investors betting Jerome Powell will send somewhat dovish signals at Wednesday’s high-stakes policy decision.

Since the Federal Reserve last raised interest rates in mid-June, the S&P 500 has advanced 3.5% while the Bloomberg US Treasury Index is up 2.7%. It’s the first time in 22 years that each asset was up at least 2% before a rate increase.

While stock investors have pared some of their sanguine bets in two of the last three sessions, the set-up heightens the drama over this week’s meeting of the Federal Open Market Committee, where policy makers are widely expected to enact a 75-basis-point tightening.

Fixed-income and equity camps are likely expecting that Fed Chair Powell’s hawkish mission will be tempered by signs inflation has peaked as an economic downturn nears -- a wager not without significant risk.