FOMC Meeting, Expected Hike 75bps

The FOMC will conclude it’s monetary policy today. The expectation is that traders are pricing in nearly 90% odds of a 75bps interest rate hike, an expectation that was supported by the Wall Street Journal’s. Traders are currently pricing in a peak Fed Funds rate around 4.9% in May 2023, and this is where it’s more likely to see expectations shift in the wake of this week’s Fed meeting. Traders should be more focused on the Fed’s expected destination not the journey in the coming months.

The stakes couldn’t be higher for this month’s FOMC meeting. While the decision for a 75bps hike itself seems relatively straightforward, the accompanying statement and press conference will be closely monitored for any hints that the central bank is thinking of slowing the pace of rate hikes in the coming months. Based on the central bank’s September economic forecasts and comments from participants like, the Fed will likely start to debate slowing the pace of rate hikes in its December meeting. The two more NFP reports and another CPI print scheduled before the Fed’s next meeting in December, the central bank will avoid pre-committing to any specific path this far in advance.

The unemployment rate remains near historic lows, with the most recent reading showing just 3.5% unemployment in September. In other words, the full employment half of the Fed’s dual mandate seems to be comfortably met for now, so we would expect the central bank to emphasize the risks of continued elevated inflation, especially after the Fed’s preferred Core PCE measure of inflation has risen for two straight months is currently running at 5.1%, more than twice the central bank’s 2% target and near the multi-decade highs that we saw in Q1 of this year.

The clearest market impact from the Fed meeting will be on the US dollar. After forming a clear, consistent uptrend through the first three quarters of the year, the USD index has lost some momentum over the last month and is now testing support at its 50-day EMA and rising trend line. Any clear hint about a pivot to a 50bps rate hike in December could take the greenback below this key support zone around 109.50, opening the door for a pullback toward 108.00 next, whereas a full steam ahead message around interest rates would reinvigorate the dollar uptrend and take the dollar index back toward its highs above 114.00.