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"The time has come The long-awaited September FOMC meeting has finally arrived, and we retain our out-of-consensus call for a rate hike on Wednesday.
Mixed economic data last week, including disappointing retail sales amid a solidifying CPI, coupled with dovish commentary by Board members Brainard and Tarullo, have reduced market expectations of a hike, with a 20% probability priced in. We see the likelihood of a hike as higher than market pricing, and there is scope for material USD strength if the Fed delivers.
If the committee instead stays on hold, more hawkish members will need to be placated with stronger language that points to a December rate increase. We would expect limited USD potential downside if this is the case.
The market will also pay attention to the FOMC's Summary of Economic Projections. We foresee a 25-50bp decline to the appropriate policy path, the ''dot plot''. We think the median member sees conditions as likely to support only one hike this year, and the appropriate policy path is likely to decrease by 25bp in parallel in 2017 and 2018. Given the very shallow rate path already priced in, the downward revisions should not have a meaningful effect, in our view.
Finally, we expect a 25bp shift down in the long-term fed".
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