Nothing in US data to warrant Fed rate hike, markets to be disappointed by Warsh remarks

Barring a miraculous, out of the blue peace announcement in the next day and a half, we think that the Fed will have no choice but to strike a hawkish note on Wednesday. The statement will once again be a short one, and will no doubt avoid the type of forward guidance that chair Warsh has shown a clear aversion to. We instead expect the Fed to rely on familiar phrases about “elevated uncertainty” and a data-dependent approach. This would provide the bank with maximum flexibility to hike at future meetings, without needing to explicitly say as much.

There will be no dot plot of rate projections at this week’s meeting, which we think may be a quiet source of relief for the committee as pinning down a rate path during a fluid conflict would be an unenviable task.

Focus will instead be on the remarks from chair Warsh’s press conference. Wording along the lines of the FOMC being “vigilant to upside risks to inflation” would signal intent without cementing expectations for hikes ahead. His characterisation of the oil spike could also be important for markets, both in terms of his framing of the supply shock and whether this is beginning, or expected, to feed into broader price pressures.

With a September hike now fully priced in by futures, we think that the bar for a hawkish surprise that meaningfully boosts the dollar is high.

To move the needle, Warsh may need to firmly signal that a September hike is coming, yet his well documented aversion to forward guidance means that this seems unlikely. The more probable outcome is one where the Fed illustrates a hawkish intent without confirming it outright, something that we think risks disappointing markets that are already pricing in a lot of positive news for the dollar. This could mean that any post-FOMC meeting gains in the dollar are short-lived, barring a further escalation in the Iran conflict and advance in oil prices.