Seven fundamentals for the week: Fed set to fire up markets, and there's much more in store

Inflation is not too hot, but the job market is more worrying – that is the growing narrative about the US economy. Now, the Federal Reserve (Fed) is set to cut rates, in a decision with many moving parts. And there's more in store.

1) Will Fed's Cook get to vote on the Fed decision?

After US President Donald Trump announced on August 25 the dismissal of Lisa Cook, a Governor at the Fed, she went to court, which allowed her to stay on her job while the case makes its way through the judiciary. The White House appealed, and a fresh ruling could come before the Fed decision.

If the court keeps Cook away from the Fed, it would create expectations for a more dovish policy, which would likely boost Gold while weighing on the US Dollar (USD). Investors may shudder at the central bank's erosion of independence, but that could fade away if money becomes cheaper.

A confirmation that Cook can participate and vote in the next Fed decision is priced, but anything can happen.

The court ruling could come while the Senate approves Stephen Miran, a White House economic adviser, as a Fed governor.

2) US Retail Sales may show further consumer strength

Tuesday, 12:30 GMT. Never underestimate the US consumer, who endures inflation, recession, and everything on its way to the till. Shoppers may tell pollsters they are unhappy, but they continue consuming.

The world's largest economy leans heavily on services and consumption, making this economic figure important, despite being prone to revisions. Sales rose by 0.5% in July, and the economic calendar points to a more moderate increase in August. This release's impact on price will likely be short-lived with the Fed decision on the horizon.

3) UK CPI set to shape BoE expectations

Wednesday, 6:00 GMT. Inflation has fallen in the developed world, but in Britain, the climbdown has been slower. Britain's Consumer Price Index (CPI) and also core CPI stood at 3.8% YoY in July, and only minor changes are likely in the report for August.

The data is set to impact the path of interest rates in the UK, coming just a day before the Bank of England's (BoE) decision.

4) Fed decision hinges on dot plot, Miran and Powell's fear of unemployment

Wednesday, 18:00 GMT, press conference at 18:30. The world's most powerful central bank is set to cut interest rates by 25 basis points, the first move this year – but probably the beginning of a broader cycle.

The Fed has two mandates: price stability and full employment. On the former, inflation has substantially come down from the highs, but has failed to reach the bank's 2% goal on the core Personal Consumption Expenditures (PCE) – its preferred measure of underlying price pressures. Core PCE stood at 2.9% in July.

Nevertheless, the interest rate cut is mainly driven by jitters in the job market, the Fed's second mandate. The US economy created only 22K new positions in August, and recorded an average of 29K in the past three months.

For markets, the question is: what's next? And here, there are three keys.

1) Dot plot: First, the Fed's quarterly forecasts, aka "the dot plot." Bond markets price rate cuts in October and December in addition to September. Do Fed officials coalesce around that number? Additional cuts in the central bank’s projections would boost Stocks and Gold, while fewer would support the US Dollar.

2) Unemployment fear: The second factor partially stems from the same dot plot. It also includes forecasts for the unemployment rate. Do officials foresee it rising quickly or slowly? At 4.3%, joblessness does not seem widespread, but history shows that layoffs can snowball.

Apart from the dot plot, Fed Chair Jerome Powell's comments about the labor market are critical. A worried tone could scare markets, even if the implication is further rate cuts.

3) Miran's choices: The third factor is what the freshly minted governor opts for. Stephen Miran is no regular Trump appointee – the current president also nominated Powell in his first term.

Miran is part of a mission to gain a majority for Trump at the central bank. He also told a Senate committee that he intends to keep his job at the White House, and earlier this year, he suggested the US should act to weaken the US Dollar.

The lowest dot on the plot, where officials suggest interest rates, will likely be Miran's, and could hint at where the President aims interest rates to be. He could take a step further. The new governor could dissent and opt for a larger rate cut, making it public. By how much? It is hard to know, but the larger the suggested cut, the more significant the impact for markets.

All in all, the Fed's September decision will be one to remember.

5) BoE set to leave rates unchanged due to high inflation

Thursday, 11:00 GMT. The Bank of England is set to leave interest rates unchanged at 4.00% as UK inflation remains stubbornly high. Contrary to the Fed, the London-based institution does not have an employment mandate.

But similar to its American parallel, the BoE consists of different voices. Last time, the bank's Monetary Policy Committee (MPC) barely reached a decision to reduce borrowing costs, requiring a second round of voting before a 5:4 majority in favor of a cut was mustered.

This time, economists expect a broad vote in favor of leaving borrowing costs unchanged. Any significant contrast with the Fed would trigger big moves in the GBP/USD pair.

6) US jobless eyed after big leap

Thursday, 12:30 GMT. How is America's labor market doing? Weekly Initial Jobless Claims may provide some answers, especially given the Fed's focus on unemployment.

In addition, last week's figure was extraordinarily high with 263K – the highest since October 2021. Was it a one-off related to reporting issues in Texas? The economic calendar points to falls. Another figure above 250K would further fuel interest rate cut speculation.

Another note: the jobless claims data relate to the week ending September 12 – the same week that NFP surveys are held in.

7) BoJ may try sounding hawkish

Friday, during the Asian session. The Bank of Japan (BoJ) has been raising interest rates while other central banks have been cutting them. Rising rice prices have gripped the public's attention, in addition to the increased costs of other goods. Japan is more familiar with deflation, not inflation.

However, the BoJ's last rate hike came in January, and the next one seems elusive. Governor Kazuo Ueda and his colleagues are likely to continue paying lip service to raising rates, perhaps at the last meeting of 2025, but it looks more elusive than ever. The Japanese Yen (JPY) will likely weaken even in response to hawkish rhetoric.

Final thoughts

This Fed decision comes at an inflection point for the US and global economies, on the backdrop of various upheavals: tariffs, the emergence of AI and geopolitical storms. It could trigger several waves of market moves, so trade with care.