The Federal Reserve is set to raise the interest rate for the second time after the financial crisis, one year after the first, historic hike. That will not be a surprise and it is already baked into prices. The big question is what’s next?

Traders will try to assess the FED’s path in 2017 in beyond. Will the FED react to Trump like markets did? Will they adopt a “wait and see” approach? Or will they see the glass half empty and go dovish?

These are the three scenarios. Before tackling them, a bit of background.

Second hike background

When Fed Chair Janet Yellen and her colleagues raised rates in December 2015, their forecasts for rates, known as the “dot-plot” showed a central tendency of no less than four rate hikes in 2016. Since then, the economy has moved more slowly, especially in the early part of the year, so the rate hike was pushed back again and again.

During the summer, a temporary scare in jobs growth was discarded as a blip, and growth had accelerated. Yellen was talking about a stronger case for a rate hike in September and the FOMC statement from November declared that the case was strengthening. Good jobs reports, especially that for October (published in November) which showed an acceleration in wage growth, cemented the hike.

Another big event that happened in November was the election of Donald Trump as President. The initial shock lasted only a few hours. The pre-election narrative was that Trump would start trade wars, send stocks tumbling down and that the FED would wait for things to calm down.

Chances for a rate hike dropped sharply only to rebound within hours, together with stocks. The new narrative is that Trump’s promises of stimulus would turn into reality, starting a virtuous growth cycle, especially as Republicans hold all branches of power.

So, government spending and tax cuts would also push inflation higher and the FED will react with an accelerated path of rate hikes.