MUFG: Key points on today’s FOMC decision

MUFG delves deep into the anticipated FOMC decision, suggesting that, while the FOMC will most likely keep the fed funds rate unchanged, market participants should be keenly watching for any deviations in the typical messaging from the Federal Reserve.

Key Takeaways:

1. Rate Expectations: The market has virtually no expectation of a rate hike, and if this pans out, it will mark the first time the FOMC has not made consecutive adjustments since the beginning of the tightening cycle.

2. From ‘Skip’ to ‘Pause’: The consecutive lack of action from the FOMC might raise questions about when this “skipping” translates into a definitive “pause” or the end of the tightening cycle. However, Fed Chair Powell might not be inclined to send strong signals pointing towards either a pause or cessation of tightening.

3. Powell’s Mantra: It is expected that Powell will reiterate the strengths of the economy, the prevailing inflation levels, and the need to maintain the restrictive policy rate. The ‘higher for longer’ sentiment is likely to be emphasized.

4. Potential Market Movers: While the market is familiar with the FOMC’s general stance, any fresh elements in Powell’s messaging could be pivotal. Key areas to watch:

   • Inflation Concerns: Will Powell highlight potential inflationary pressures stemming from the Middle East conflict between Israel and Hamas?
   • Labor Market Dynamics: Powell’s take on the sustained strength in the labor market, especially with wage inflation still high, will be crucial.
   • Financial Market Conditions: Emphasis on the tightening of financial conditions, driven by rising long-term UST bond yields, will be crucial. A key aspect to gauge is whether Powell echoes ECB President Lagarde’s sentiment on the faster-than-expected speed of transmission.

5. December Rate Hike Prospects: The market currently places just a 25% probability on a rate hike in December. However, this could lead to a potential uptick in yields today.

6. US Dollar Momentum: The US dollar’s momentum has started to pick up again. Depending on Powell’s remarks, this uptrend might continue.

Conclusion:

Today’s FOMC decision is of significant importance, not just for its impact on rates, but for any nuances in Powell’s commentary. MUFG suggests market participants should remain vigilant for any fresh insights or shifts in the typical messaging from the Federal Reserve.

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