LIVE MARKETS-The biggest Fed surprise in recent memory? 

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THE BIGGEST FED SURPRISE IN RECENT MEMORY?

According to the latest Reuters poll, the Fed's policy meeting this week should be a damp squib but that doesn't tell the whole story.

All 104 forecasters surveyed by Reuters expect the Fed to leave borrowing costs unchanged at the 3.5%-3.75% range at its meeting this week.

But money market traders have a different view. They are currently assigning around a one-in-three chance of a quarter-point rate hike at Wednesday's announcement.

"The roughly 15% rise in oil since last week’s CPI release has helped to take the market from pricing a hike in July as a remote possibility to a meaningful risk," Goldman Sachs economists said in a recent note.

"The increase in July hike pricing over the last week has put the Fed in position to deliver the largest non-cut meeting day “surprise” in recent memory."

UBS economist Arend Kapteyn believes the rate-setting committee is split roughly down the middle in terms of those inclined to raise rates and those preferring to remain on hold, although that changes slightly when it comes to voters.

"We believe that among the voting part of the FOMC the split is 9:3 or 8:4 in favour of holding, but those that prefer to hike likely feel stronger than those that would prefer to wait," Kapteyn writes.

"As a result, Warsh could likely assemble sufficient support either to raise rates in defence of the Fed's inflation-fighting credibility or to wait for more evidence."

For a meeting widely expected to deliver no action, investors are unusually alert to the possibility that the Fed has other ideas.

(Samuel Indyk)

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