Market pricing based on the CME FedWatch tool suggests the US Federal Reserve is widely expected to keep the federal funds rate steady at its meeting on September 19-20. Moderating core inflation (notwithstanding the uptick in headline CPI last month), cooling labour market conditions, and stabilizing the housing market argue for a pause.

Meanwhile, Fed Chair Powell is likely to be balanced in his assessment, emphasizing data-dependency with regard to the near-term path of policy. His message could be similar to his message at Jackson Hole last month, where he left the door open for further tightening to cool still-high inflation and above-trend growth.

The bigger question is whether the Fed is done with rate hikes. Recent strong macro data raises the odds of a resurgence in economic activity, raising the risk of renewed price pressures. Hence, while the September rate decision could be a done deal, the November meeting could be a close call. In this regard, next month’s payroll and CPI data will be key before the November 1 FOMC meeting.

The key focus next week will be on the Summary of Economic Projections (SEP) which will be released along with the September FOMC statement. In particular, the 2023 median policy rate could show one more 25 basis-point hike to 5.50%-5.75%, in line with the June assessment. Increased interest would be on whether the 2024 median policy rate forecast is raised from 4.6% projected in June.

From a market perspective, the SEP could be a key driver. Even a 25 basis-point shift higher would still leave roughly 50 basis-points gap with the current dovish 2024 market pricing. Anything greater than that would be perceived to be quite hawkish, triggering a reassessment of the dovish market pricing next year, pushing up USD globally. On the other hand, if 2024 median policy rate projections are unchanged, USD’s rally could take a breather. However, any retreat could be temporary while the US economy outperforms the rest of the world.