📢 Ahead of the FOMC 📢
Hawkish or Dovish hike?
☛ Market pricing: 98.9% probability of a 25bps hike and 1.1% probability of a 50bps hike – this implies that the market has a tiny bit of hawkishness priced in
☛ Economic growth has likely been too firm recently to declare victory over the inflation fight
☛ Risks of a resurgence in inflation: strong housing market; tight labor markets; robust US consumer confidence
☛ Recent slowdown in inflation makes it harder for the data-dependent Fed to signal further rate hikes
♦ Prices of goods have been consistently declining
♦ Core inflation, which excludes volatile food and energy prices, posted its smallest monthly increase in more than two years in June, rising less than 0.2% from the prior month
☛ Most economists do not anticipate strong guidance on hikes beyond July
☛ Language on ending the hiking cycle is also unlikely, especially with upside risks remaining to the medium-term inflation outlook
☛ Would the Fed want to see evidence of slowing economic activity, before declaring victory on the inflation fight?
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📌 FOMC Statement – Watch for any revision to the “inflation remains elevated” language
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📌 Press conference
o Dovish if Powell deemphasizes “dots” that implied one further 25bp hike in 2023
o Hawkish if Powell emphasizes the resilience of activity, could lead to an upside in medium-term inflation expectations or signals a potentially higher neutral real interest rate
Go Deeper:
Gauging the Influence of the Fed’s Hawks and Doves (BBG)
What to Expect From Central Banking’s Big Three (BBG)
Fed Set to Raise Rates to 22-Year High. Here’s What to Focus On (WSJ)
Why the Fed Isn’t Ready to Declare Victory on Inflation (WSJ)
The Real Fed Debate This Month: What Would Prompt a Rate Hike This Fall (WSJ)
'Immaculate disinflation' places Fed in purgatory (Reuters)
No happy dance on the agenda as Fed ponders resilient US economy (Reuters)