FxWirePro: A preview of Fed’s September meeting

Next week, the Federal Reserve of the US is scheduled to announce its funds' rate.

It is expected that the US Federal Reserve to leave interest rates unchanged at its September policy meeting.

However, it will almost certainly signal a start to unwinding the asset holdings built up through QE.

The Fed’s ‘dot plot’ will provide a signal of the interest rate outlook for the rest of 2017 and beyond.

We now expect no further interest rate rises this year, but three moves in 2018.

As markets already attach a less than 50% probability on a December hike, a ‘dovish’ signal may have little impact.

But a big gap between Fed and market medium-term expectations point to the possibility of substantial volatility.

The US central bank has been ahead of most others in tightening monetary policy over the past two years. It has raised its policy rates four times taking them from a low of 0.25% to 1.25%. Until recently there appeared to be a consensus on the committee for one more rate hike this year and three further moves in both 2018 and 2019, but as its September meeting approaches, it now seems divided on what to do next. Solid output and employment growth, and a seemingly tight labor market, still provide support for that plan.

However, wage growth remains relatively subdued, while the annual rise in the Fed’s preferred inflation measure has fallen from 2.2% in February to 1.4% in July, confounding expectations, so far at least, that it would gradually rise to the Fed’s inflation target of 2%.

As a result, a significant number of FOMC members are arguing that the committee can afford to be “patient” before next raising interest rates. The dollar index was also flat on the day.