What to Take from September’s FOMC Meeting

What to Take, September, Fed members, George, Mester, Rosengren, FOMC Meeting, Fundamental Analysis, fx trader, forex

At their September meeting the FOMC kept rates unchanged at 0.25% - 0.50%, with Fed members George, Mester and Rosengren dissenting for a 25 basis point hike. In their economic projections, the Fed lowered their median funds forecasts for 2016 to 0.6% from 0.9%; 2017 to 1.1% from 1.6%; 2018 to 1.9% from 2.4% and their longer run forecast to 2.9% from 3.0%. PCE and GDP for the end of 2016 were also lowered to 1.3% from 1.4% and 1.8% from 2.0% respectively.

Is a hike on its way?

So what does that data mean - can we expect a rate hike this year from the Federal Reserve? The answer is ‘most likely’.

In their accompanying statement the Fed stated that: ‘The case for a hike has strengthened as the forecast shows an increase in rates in 2016, with 14 out of 17 members seeing one hike this year’. Following the Fed’s rate decision, economic projections and press conference, USD weakened across the board as a more hawkish tone was generally expected, while there was slight disappointment that there was no firm commitment to a December hike.

Let’s drill the data down further

Preliminary GDP for Q2 was revised lower to 1.1% from the advanced estimate of 1.2%. However, this was in line with expectations. The report also showed that household spending has increased to its highest level in a year and a half. However, this was not enough to offset the decline in business investment and company earnings.

August’s employment report saw all three data points miss expectations with Non-Farm Payrolls printing at 151K versus expectations of 186K. The Unemployment Rate printing was unchanged at 4.9% versus expectations of 4.8%. Meanwhile, Average Hourly Earnings declined to 0.1% from a prior of 0.3% and expectations of 0.2%.

Inflation for August beat expectations across the board with CPI printing at 0.2% month-on-month (m/m) and 1.1% year-on-year (y/y) versus expectations of 0.1% and 1.0% respectively. Core CPI (m/m) printed at 0.3% versus expectations of 0.2%, while Core CPI (y/y) printed at 2.3% versus expectations of 2.2%.

PCE for July saw PCE (y/y) decline to 0.8% as expected from a prior of 0.9%. Core PCE (m/m) and (y/y) remained unchanged from prior at 0.1% and 1.6% respectively, despite expectations for Core PCE (y/y) to decline to 1.5%. Given the improvement in August’s CPI, should August PCE also show further improvement, expectations for rate hikes will likely continue to increase and keep USD supported.