The Fed’s upcoming September meeting, due to conclude with a rate decision and press conference tomorrow, is widely expected to see the central bank raising rates for the third time this year by a further .25%. The move was well signaled in the minutes of the July meeting which said that “Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation.”
Market Banking on a September Hike
Market pricing for a September rate hike shot up in response to the meeting which saw the Fed upgraded its assessment of economic growth from “solid” to “strong.” Current market pricing shows a hike at this meeting as a virtual certainty given the strength of Q2 and Q3 data with Inflation at target and unemployment below the mark and decreasing further. August payrolls averaged 201k in August with hourly average earnings rising 0.4% to hit new cycle highs of 2.9% year on year.
Balance Sheet Normalisation To Continue
Alongside the .25% rate hike, the market is also looking for the Fed to take the next step in its balance sheet normalization program which was announced last year in October 2017. Since then, only principal payments which exceed a rising annual cap are reinvested. The threshold was set at USD 10bln per month and was set to rise by further steps of USD 10bln in 3-month intervals with different maximum limits set for US Treasuries, agency MBS, and agency debt. Once each cap hits its max limit, which will be the case in October this year, they will remain intact until the FOMC agrees that the Fed isn’t holding more securities than necessary to implement monetary policy efficiently and effectively.
Projections In Focus
With the rate hike widely signaled, the main focus will be on the updates to the Fed’s forecasts, including the dot plot, along with any changes to the statement and forward guidance. Regarding the economic projections, there is a good chance the growth will be revised higher for 2018 given the bumper 4.2% 2Q GDP print. Around the middle-interest rate path, there is likely to be a stronger consensus around four hikes in 2018, 3 in 2019 and 1 in 2010. The newly released 2021 projections will give a valuable insight into the Fed’s longer-term view and its plans for managing the overshoot in the labor market.
Fed To Drop “Accommodative” From Statement?
Regarding the statement, the market will be keen to see whether the Fed drops the term “accommodative” from its description of the monetary policy in light of the minutes which revealed that members discussed the dropping of the term, saying it will likely soon be appropriate to do so. However, regardless of whether or not the bank drops the term, the dot plots will give enough insight into how the bank intends to run its policy going forward. An upward shift in the average along with a greater concentration at the median should fuel further USD buying.
The USD Index is sitting on a significant level of support with the completion of an ACBD symmetry swing into the 93.19 level which was significant support earlier in the year. If price breaks below this level, a deeper run down towards the 92.08 level is in view. To the topside, the next resistance level will be a retest of the broken bullish channel base around 94.35 with the bearish trend line from the year to date highs coming in around the same level also.