Over 97% of traders expect the Fed to hold rates unchanged when the FOMC two-day meeting concludes tomorrow. The vanishingly small number of dissenters are betting on a quarter-point hike. That means that the bulk of the focus for this event will likely be on the statement and particularly Fed Chair Jerome Powell’s post-rate decision presser. But, there is still a smaller chance of market volatility than usual.

That doesn’t mean that Powell can’t shake things up quite a bit. The market is still at odds with the Fed. The latest forecast from the Fed is that there will be one more rate hike before the end of the year. But the majority of traders don’t believe that. It’s not a super strong consensus – just 57% of traders – but the market is not pricing in another rate hike after tomorrow. So, if Powell comes out insistent on the need for more rate hikes, the dollar could get an extra boost.

Anticipating the Event

One of the problems for analysts, which can affect the market reaction, is the ambivalence around what could happen. At the Jackson Hole Symposium, Powell said the Fed would be data dependent when it came to any future hikes. That sentiment was echoed by several FOMC voters last week, just before the start of the pre-rate decision blackout period.

The problem is, the data that has come out since then hasn’t been definitive in any direction. The latest labor data had something for both sides. There was solid job growth and wages were well above inflation. But the unemployment rate ticked up and over half a million new people were looking for work.

Cutting through the uncertainty

A similar situation was repeated with the pivotal CPI data last week. The headline rate increased for the second time in a row. But the Fed cares more about the core rate, which fell in line with market expectations. But August saw an unexpected acceleration in the core rate, affirming that ambiguity for the Fed.

Since the start of the hiking cycle, it seems that Powell has committed to erring on the side of tightening. There seems to be a palpable concern among even doves on the FOMC that a too early declaration of victory in the fight against inflation could allow prices to creep back up and force the Fed’s hand. That has already happened with other central banks who announced pauses, only to see inflation rising again.

It could be a matter of timing

It’s very unlikely that the Fed will hint that rates won’t keep going up in the current circumstances. With the economy forecast to grow healthily in the third quarter, and core rate still doubling the target rate, the Fed isn’t under any pressure at the moment to suggest that rates have peaked.

What Powell can do to kick the can down the road is to reiterate that further hiking might be necessary, but the Fed will closely follow the data. That would likely be interpreted by the market as maintaining the status quo, letting the dollar continue in its current trajectory. But if Powell talks too much about the worries of rising inflation, that shaky majority expecting no more rate hikes could dissipate enough to push the dollar higher.

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