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All eyes and ears are on the FOMC this week!

Are they likely to announce a full 1.00% interest rate hike?

Here’s a quick look at what happened before, how the dollar reacted, and what’s expected this time.

What happened last time?

  • FOMC hiked rates by 0.75% as expected
  • Fed funds rate stands at target range of 2.25% to 2.50%
  • Powell said that “moderately restrictive” stance is warranted
  • Inflation remains elevated, employment gains robust

During their July monetary policy pow-wow, Fed head Powell and his fellow FOMC members agreed to hike the benchmark rate by 0.75% to a target range of 2.25% to 2.50%.

This didn’t really take most market watchers by surprise since the U.S. central bank already hiked by 0.75% in their June meeting. Besides, the latest round of inflation data back then pointed to stubborn upside price pressures, so the Fed had no choice but to act aggressively.

Powell reiterated that their “moderately restrictive” policy stance is warranted, as the job market is doing well even though spending and production slowed down.

More importantly, the Fed head honcho hinted that “another unusually large rate increase” is in the cards for the next meeting.

He even said that the FOMC “wouldn’t hesitate to go higher” since they are “determined” to tighten financial conditions and keep inflation in check.

USD Forex Pairs 15-min Charts Overlay

USD Forex Pairs 15-min Charts Overlay

Surprisingly, the Greenback took hits across the board during the actual announcement, as traders likely booked profits off their long USD positions. That’s some “buy the rumor, sell the news” action right there!

Risk-on flows also likely came in play, as the Fed statement brushed off recession worries and signaled that they would be more data-dependent in their next meetings.

What’s expected this time?

  • Another 0.75% interest rate hike priced in
  • Some are projecting a 1.00% rate increase
  • Fed officials to highlight stubbornly high inflation

Everyone and his momma are expecting at least a 0.75% interest rate hike from the FOMC this week since Powell pretty much confirmed it during their July meeting.

The latest round of U.S. economic figures also suggest that the Fed won’t be taking it easy anytime soon since CPI and retail sales data beat expectations.

Instead of printing a slowdown in inflation, the headline CPI posted a 0.1% uptick while the core figure accelerated from 0.3% to 0.6% in August.

Meanwhile, headline retail sales showed a 0.3% rebound in spending in the same month while the NFP report reflected stronger-than-expected jobs growth. By the looks of it, the consumer sector seems to be doing just fine!

This is probably why markets are pricing in a 25% probability of a 1.00% interest rate hike in this month’s Fed decision, as policymakers really need to prevent the economy from overheating.

Should FOMC members stick to their usual 0.75% hike, traders would likely pay closer attention to the updated economic projections and dot plot forecasts. After all, this would set the tone for future monetary policy moves and probably have clues on how long the tightening cycle could go on.

If you’re not comfortable trading around additional volatility during this major market event, there’s no shame in sitting on the sidelines and watching price action play out!