What will the Fed do in December, what decisions will it make in 2023?

How will Powell speak today?

Let us recall that the present the pace of monetary tightening is definitely faster than in the past. I mean the cycles started in 2004 and 2015. The market will mainly focus on what Powell will announce regarding the December decision, because the November one is already in prices. Most likely, the pre-holiday change will be made on the basis of the data published so far, mainly on inflation. Labor market data will also be important. If cooling signals begin to appear there, then a slight Fed application of the brake is more likely.

Today's decision will be the fourth one in a row. It will raise the target range of Federal Fed Funds to 3,75-4 percent. At the moment, however, the market is mainly focused on the medium-term perspective of the next steps. Macro data will determine further pace of tightening. The latest core inflation reading rose to 6,7%. There is currently an ongoing debate as to whether inflation data catches all changes in a timely manner. Perhaps the easing of the dynamics of price growth will be delayed. However, the Fed will be cautious about improving the situation. After all, the Federal Reserve is slightly late with decisions, because for a long time the FOMC's ranks were dominated by the narrative of the temporary phenomenon of inflation, which turned out to be wrong.

What about inflation in the US?

The Fed cannot allow market doubts to arise over the continued fight against inflation. This is because the expectations regarding CPI will remain anchored to a large extent.

So what could be the market reaction today? If the environment focuses on the fact that the Fed signals a lower pace of further tightening, then the USD will depreciate and the stock markets will rise. If we receive a hawkish surprise, e.g. that the Fed assumes an increase in interest rates to 6%. (which the market is not pricing in at the moment), then it will be positive news for the dollar and negative for Wall Street.

Source: Łukasz Zembik, OANDA TMS Brokers