US Dollar: Fed path and credibility in focus – Commerzbank

Commerzbank’s Antje Praefcke notes that the FOMC is widely expected to raise the federal funds rate by 25 basis points after stronger-than-expected August inflation. She argues that a surprise pause would hurt Fed credibility and the Dollar, while a hike is largely priced in. Future Dollar moves are seen depending more on macro data as Chairman Warsh shuns forward guidance.

Fed decision and Dollar reaction

"Tonight’s FOMC meeting will be exciting. Not only because of the question of whether the Fed will raise the benchmark interest rate by 25 basis points today - which is what the market and our experts expect, given that last Friday’s August inflation figures came in higher than expected."

"So how will the foreign exchange market react to all this? The decision not to raise rates would come as a surprise and is likely to raise serious doubts about the Fed’s commitment to ensuring price stability."

"Hence, given the latest inflation figures, a majority on the FOMC is likely to vote to increase the federal funds rate. This would help allay doubts about the Fed’s credibility."

"However, if the dot plots suggest that further hikes are quite likely, the market is likely to see this as confirmation that the benchmark interest rate could rise further, which could cause the dollar to gain ground."

"In general, however, the dollar’s reaction on the FOMC meeting is difficult to predict, as Warsh is not a supporter of forward guidance and the Fed's reaction function under his leadership is not yet clear."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)