Investors waiting for FOMC policy guidance
Today FED two-day meeting will be finished, and right after that, we will have the statement. As always, 30-minutes after publishing the statement, Fed chair Powell will have a press conference, which is very important to watch better to understand FOMC members' economic outlook and plans.
The CME FedWatch Tool now shows the probability of a 75 bps rate hike at 74%, while the other 24% expect a 100bps rate hike. Meanwhile, money markets are pricing in an 83.4% chance that the target rate range will climb to between 3.25% and 3.5% or higher by year-end. The market already priced in a 75 bps rate hike, as Fed focused more on fighting the high inflation as its central policy at the moment.
Fed is ending the pandemic-era support because inflation is still increasing. Even after the most significant rate hike since 1994 in June, the latest published CPI numbers had no sign of softening at 9.1%, which was worrying. Now Fed's focus is on controlling inflation, as Mr. Powell and other members repeatedly mentioned.
In the statement or Powell's speech, it is very important to see the policy guidance for the September meeting. In fact, it is the primary market mover tonight, as other possibilities already have been priced in.
While inflation is still increasing primarily because of food and gas prices, the US labor market remains healthy, with 372,000 newly created jobs in June. The unemployment rate in the latest update was also solid and unchanged at 3.6% compared with a month ago.
With these data, the only game changer is inflation. If in the following updates before the September meeting we see some signs of peaking inflation, then we may see lower hikes or even pause to give time to the market. Otherwise, 50 bps or even a 75 bps rate hike will be on the table. We can now say with more certainty that the Fed is prepared to tolerate a weaker growth outlook until the inflation monster is under control.
US dollar reaction depends on Powell's speech and FED guidelines for the September meeting. If FED accepts and sees some signs of peak inflation, it can slow down on its tightening path in the face of the economic downturn, which can decrease the USD value; otherwise, bullish interest in the USD index chart can continue.
On the stock market front, investors already have considered a 75 bps rate hike in their calculations, so as mentioned above, surprise can come only in the speech and press conference. Stock market reaction today will depend on FED's economic outlook and plans, which we can understand from Mr. Powell's speech.
In general, we can say that for now, none of the bullish and bearish factors have enough power, and the market participants are looking for practical signs in the market rather than counting too much on FED's rhetoric. Recently, there have been increasing signs that the market has lost confidence in the FED policies.
