Will Fed Remain ‘Accommodative’?

An FOMC decision to hike rates on Wednesday is a foregone conclusion but signals about what's next are what will move the market. GBP was the top performer Tuesday while JPY lagged. The Premium video on the current and potential trades titled:"Ahead & Before the Fed" is now posted.

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The Conference Board on Tuesday said September US consumer confidence was at 138.4  compared to 132.1 a month earlier. That's a fresh high since 2000 as optimism spreads about jobs and the economy. Numbers like that are why markets and economists are virtually unanimous that the Fed will raise rates to a range of 2.00%-2.25% on Wednesday. Today's release of higher than expected 3.5% rise in US new home also helped sentiment.

The bigger question is whether they will stay 'accommodative'. The current statement says that policy remains accommodative but that word could be removed. If so, such a removal would make today's rate action hike a dovish hike as it would indicate the Fed is closer to neutral and the pace of hikes could soon slow. While it would not t jeopardize a December hike, it may be the difference between 2 and 4 hikes in 2019.

A compromise could be saying that policy is 'somewhat accommodative' which would tee up its removal in December. All else equal, how that's managed will determine the kneejerk in the US dollar. Nonetheless, it's not the only moving part. The Fed will release new forecasts that are likely to include a bump up in the 2018 GDP forecast above the currently 2.8% level.

The dot plot focus may be on the 'longer run' median which could move up to 3.0% from 2.75%. That might not necessarily mean anything, because the composition of forecasters is changing but it would fit into the narrative of a more-hawkish Fed. It is too early in the year for markets to worry about whether 3 or 4 Fed hikes will be signalled for 2019.

In the press conference, the market may hone in on the path of rates next year. At the moment, there's a wide range of expectations. If Powell is upbeat on the economy and suggests wage pressures, more hikes will be priced in and the US dollar will rally. And rest assured that any change in the forecasts and the word "accommodative" will be widely questioned during the Q&A.

There's a risk he could temper than by signaling slow progress on inflation and a potential wait-and-see approach. With market positioning already heavily long dollars, the risks are balanced.