Live Data Coverage: September Federal Reserve Meeting
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September FOMC Preview:
- Rates markets are fully pricing in a 75-bps rate hike by the Federal Reserve today, with an outside shot at a 100-bps rate hike.
- Rate hike expectations have backed down over the past week, after initially spiking following the August US inflation report (CPI).
- We’ll discuss how markets may react to the September Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT on Wednesday, September 21, 2022. You can join live by watching the stream at the top of this note.
75-bps Hike Likely
The tone deployed by Fed policymakers the Jackson Hole Economic Policy Symposium and the September Fed meeting suggests that a 75-bps rate hike is very likely, even after Fed Chair Jerome Powell suggested, at the July Fed meeting, that rate hikes to such a degree were less likely moving forward. Having abandoned forward guidance to embrace a data dependent stance, the hotter than expected August US inflation report (CPI) and the strong August US nonfarm payrolls report have bolstered the case for an aggressive tightening effort.
Regardless of a 75-bps or a 100-bps rate hike, with a new Summary of Economic Projections (SEP) due out, market participants will be focused on where Fed policymakers believe the Fed funds rate will reside at the end of the rate hike cycle. In a sense, the destination is more important than the journey: if the terminal rate is beyond 4.5%, where markets are currently priced, then today could prove troublesome for risky assets.
Eurodollar Futures Contract Spread (September 2022-December 2022) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Daily Timeframe (September 2021 to September 2022) (Chart 1)
September thus far has been defined by rapidly rising Fed rate hike odds. On August 1, there was one 25-bps rate hike priced-in through the end of 2022, with a 34% chance of a second 25-bps rate hike (50-bps in total by the end of the year). Now, 100-bps worth of rate hikes are fully discounted, with a 4% chance of a fifth 25-bps rate hike.
To an extent, the market is suggesting that the last few Fed rate hikes may materialize in the coming months – with the bulk of the tightening efforts arriving this week, where a 75-bps rate hike is the base case scenario. Given the outside chance of a 100-bps rate hike, should the Fed deliver 75-bps and not offer hawkish forward guidance, the September Fed meeting could shape up to be a ‘buy the rumor, sell the news’ event for the US Dollar.
Rate Hike Timeline
Fed fund futures remain more aggressive than Eurodollar contract spreads in the near-term. Rates markets see a 118% chance of a 75-bps rate hike in September (a 100% chance of a 75-bps rate hike and an 18% chance of a 100-bps rate hike), with additional 50-bps rate hikes fully discounted in November and December. Ahead of the Jackson Hole Economic Policy Symposium, the main rate was expected to rise to 3.552% by the end of 2022; it is now discounted to end the year at 4.208% (currently 2.50%).
- September 2022 = 75-bps rate hike (118% chance)
- November 2022 = 50-bps rate hike (90% chance)
- December 2022 = 50-bps rate hike (52% chance)
We’ll discuss how markets may react to the September Federal Reserve rate decision starting at 13:45 EDT/17:45 GMT. You can join live by watching the stream at the top of this note.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.