What to watch from FOMC meet ahead?

We expect a great deal of debate among FOMC policymakers over the path of the hikes as well as whether to go for a hike at this meeting or not. Since the last meeting in July, several policymakers openly called for a faster rate hike, while some of them scaled back their tone after employment report was disappointing as well as several other data in August.

While inflation is low to justify a slower path of a hike but the unemployment rate as well as inflation isn’t bad enough to justify policy rate at just 0.375 percent. Based on our assessment of the comments coming from the policymakers, we see four hawks and four doves at today’s voting committee. The stances of Chair Yellen and New York Fed President William Dudley are difficult to be sure of. We, expect the FOMC to maintain the current policy rate by 6-4 voting.

Focus will be on the followings –

• Policy decision –Most of the analysts and economists expect FED to hold interest rates steady at the current level of 0.25-0.5%. The market is pricing greater chance of no hike today.
   
• Economic forecasts – Changes in economic forecast would provide a general feel, how participants are viewing the economy ahead. The key will be the inflation forecast. Any major changes on inflationary front upward may mean that FED likely to turn hawkish going ahead. GDP growth forecasts may get revised down.
• Dot Plot – As of now there exits quite a disparity between market and FED policymakers. As of June forecast FOMC participants were forecasting two hikes in 2016, while market is predicting one. So it would be vital to watch out how the gap stands. Large gap could still send a hawkish message, while narrowing would act as bearish for Dollar.

• How divided is the board – While June decision was unanimous, from July, Kansas City FED president Esther George called for a hike. So, the focus will be whether others join in or she scales back looking at the August data.

• FED’s assessment of Brexit risks – How FED may react in the event of an exit will be key focus – status quo or rate cut. Is FED have contingency plans in the event of an exit.

• Press conference – As always Ms. Yellen’s press conference would be the most vital piece, where Q&A likely to provide more clarity what FED thinks about recent weakness in labour market, slowdown in growth or what it plans to do in the event of Brexit or a debt bubble bust in China.