Overview: The US dollar is trading with a softer bias in tight ranges. The euro and sterling have been confined to yesterday’s ranges, while the greenback briefly traded above JPY113.00 for the first time in two months. The South African rand and Turkish lira are leading the most emerging market currencies higher. Asian equities moved higher, led by Hong Kong, which returned from yesterday’s holiday. The MSCI Asia Pacific Index rose about 0.25%. European markets are narrowly mixed, leaving the Dow Jones Stoxx 600 flattish near midday. Consumer staples, utilities, and real estate are moving higher, while materials and consumer discretionary are offsetting. Benchmark 10-year yields are mostly one-two basis points lower, while the Italian bond outperformance continues.  

Federal Reserve: The FOMC meeting is the highlight of the day. A rate hike today has been regarded as a done deal for some time. The market may take its cues then not from the rate decision but by other things the Fed says. Four considerations may influence how the market interprets the Fed’s decision. First is how the Fed characterizes the economy and inflation. Some observers call  the deficit-financed growth as “sugar high.” The tariffs and retaliatory tariffs will likely shave growth and boost prices. 

Second is what the Fed signals about December. Recall that in June, one member changed their forecast, which was sufficient to push the median forecast to two hikes in the second half of the year. Eight saw two more hikes and seven saw three or fewer. Clarida was confirmed last month, and this will add the 16th dot. The CME’s model suggests about 82% probability of a hike has been discounted. Given numerous official comments, there is no reason to expect that the Fed will back off. 

The third is the path of tightening going forward. The median June forecasts anticipated three hikes next year. The market is not quite there. Many observers are express concern about a fiscal cliff in 2020, when the June forecasts expected two hikes. And for the first time, the Fed’s forecast horizon extends to 2021.