Fed set to skip a September hike, but will it flag one for November?
XM Group | Sep 18, 2023 07:28AM ET
· Fed expected to pause again in September
· But will it signal that it is done with rate hikes?
· Risks for the dollar are symmetrical heading into the meeting
· Decision is expected at 18:00 GMT on Wednesday
A pause with strings attached?
The Federal Reserve is widely anticipated to keep interest rates unchanged at its September meeting but what investors are more anxious to find out is whether policymakers will keep the door open to further hikes. The other big discussion point is about the rate path in 2024, specifically, if the median dot plot will be revised higher.
The US economy continues to perform well by most measures even if there are signs of some cooling off, particularly in the tight labour market. With recession odds being slashed and a soft landing looking more attainable, inflation is once again the primary concern for investors and policymakers as how quickly it falls from hereon will determine how soon the Fed can begin cutting rates.
Inflation is creeping up again
Looking at the latest CPI numbers, it’s fair to say that there’s been a bit of a setback in the progress lately. The annual rate of CPI has quickened from 3.0% to 3.7% over the past two months. That trend could continue if oil prices maintain their ascent. However, most investors are looking through this latest increase, hoping that it will be temporary, and focusing on the decline in core CPI for clues as to what the Fed will do next.
However, the recent rally also exposes the greenback to a corrective selloff should the rate path not be revised up substantially, if at all, and Powell sounds upbeat on the prospect of inflation returning to the 2% target over the medium term in his press conference. The dollar index would be at risk of tumbling towards its 200-day moving average around 103.00 in such a scenario.
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