Federal Reserve: Data driven rate path – HSBC

HSBC strategists note that the Federal Reserve (Fed) left policy rates unchanged in July, with markets now assigning a two-thirds probability to a September hike. They stress that Chair Warsh’s data-dependent stance puts upcoming United States (US) macro releases and inflation prints in focus, as labour market cooling and subdued core Consumer Price Index (CPI) could prompt investors to reassess the timing of any further rate increase.

Fed pause keeps September hike in play

"The Federal Reserve kept interest rates unchanged at its July meeting, as widely expected. Attention now shifts to September, with markets pricing in a two-thirds chance of a hike. With Chair Warsh unwilling to manage policy expectations and reiterating that the Fed is data dependent, upcoming macro releases take on added importance and could increase market volatility."

"Following a strong spring, payroll growth has moderated, while household sentiment suggests a softer labour market than the headline 4.2% unemployment rate implies. Any further cooling over the summer could prompt investors to reassess whether a September hike should be pushed back."

"The decision could go to the wire, with further CPI and payrolls releases landing shortly before the meeting. Unpredictable developments in the Middle East may also influence the outlook. Even if the Chair favoured using it, forward guidance could be a hostage to fortune at this point."

"Inflation data will be equally pivotal: a second consecutive subdued core CPI reading would cast doubt on whether broad-based price pressures are taking hold, particularly as labour cost growth appears contained and the housing market remains subdued."