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Traders are getting ready for another Fed hike

The chances of an interest rate hike announcement in December have increased in recent days, according to a new Bank of America report published ahead of the Federal Reserve's meeting this Wednesday.

"Interestingly, market expectations for December have climbed higher over the past few days, pricing in nearly even odds of a move in December," strategists and economists, led by chief U.S. economist Michelle Meyer, wrote in a Friday report.

In the report, titled "Like Watching Paint Dry," the strategists pointed out that the overnight index swap market is pricing in a roughly 45 percent chance of a hike in December, up from just 20 percent toward the end of the week ending Sept. 8. The report's authors anticipate the next hike will come in December, with three more hikes next year. This increase in expectations comes on the heels of firming inflation figures.

Echoing a similar sentiment, Goldman Sachs economists said last week that the chances of a third rate hike this year have risen to 60 percent, from 55 percent, after the Consumer Price Index rose considerably in August.

As measures of inflation in the U.S. had again and again missed economists' expectations this year, the likelihood of further rate hikes has been called into question.

Though some have pointed to this firming in Consumer Price Index, the personal consumption expenditures is still well below the central bank's target, said Gina Sanchez, CEO of Chantico Global. Indeed, the most recent PCE reading reflected its smallest year-over-year increase since December 2015. This gives Sanchez pause about the likelihood of a rate hike coming in December.

Some are more sanguine when it comes to the market impact of a potential rate hike.

"It really is interesting because not too long ago, the fed funds [futures] were saying no December rate hike, and now it looks like there's a good chance," Eddy Elfenbein, portfolio manager at AdvisorShares, said Friday on CNBC's "Trading Nation."

"I think it would be a big mistake if the Fed were to move too soon," Elfenbein said. "But the good news is, there's still a lot of room. I don't think they would do a lot of damage, yet, to the economy or to the stock market at this point."

At this week's meeting, Bank of America strategists and economists expect (in line with the general consensus) that the Federal Open Market Committee will address its multitrillion-dollar balance sheet normalization, an announcement the report said will likely have little to no market impact given the advance notice.

Instead, the main focus will be economic forecasts and the so-called "dot plot," referring to FOMC officials' views on the fed funds rate.

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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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