September 17th is right around the corner and tension in markets is rising. Will the Fed raise rates or not? It is a very hard decision for the world’s No. 1 central bank. And it’s not the only factor, as this decision is accompanied by a press conference and updated Fed forecasts.

Here is everything you need to know: some background with 5 Fed dilemmas and 4 scenarios for the big event, including the accompanying reactions for currency markets.

Fed’s dilemma

In its latest meeting in July, the FOMC left its policy unchanged as expected and left all the options open. While they repeated the stance that the moment to raise rates is getting closer, there was certainly no hint of action in September. The phrase “data dependent” remains key once again.

Since then, we have certainly received more data and it has been confusing. For example: the recent Non-Farm Payrolls report missed on the headline but saw nice revisions and a small improvement in wages.  In addition, we had global developments that also complicate the situation.

1. Employment vs. Inflation

The Federal Reserve has two mandates: full employment and price stability. Employment is looking good, while inflation is not going anywhere fast.

Improving employment (with caveats)

The unemployment rate stands at 5.1% according to the latest Non-Farm Payrolls report. Not so long ago, the Fed committed to not raising rates at least until the rate drops below 6.5%. So, according to this measure and to historic comparisons, they should have raised it long ago.

Also other measures looks good: JOLTs , which is eyed by the Fed, is at an all time high. Job gains are at 200K+ per month in most months and the numbers are steady. They are also positive and steady when looking at jobless claims.

But, employment is low also due to more involuntary part time jobs and many discouraged people who aren’t counted. The “real unemployment rate”, U-6, stands at 10.3%. This is lower than in the past but not that good to say the least.

Weak inflation (with caveats)

Inflation is quite subdued as the Fed says: headline CPI is flirting with 0% y/y, but that’s mostly due to oil prices. Core inflation, which excludes volatile items, is at a steady 1.8%, close to the Fed’s aspiration of 2%. However, the Core PCE Price Index, which is eyed by the Fed, is only at 1.2% y/y which is quite poor.

But also here we can take a different angle: inflation is lagging. First comes GDP growth, then jobs and eventually inflation picks up. In theory, the Fed should not wait to see the white in inflation’s eyes before hiking, but rather anticipate it, stay ahead of the curve and raise rates before it gets out of control.