FED tonight: the three signals to watch first
It’s D-Day. Today is Wednesday, September 16, and it is the Federal Reserve’s monetary policy decision under Kevin Warsh. This is the most important fundamental event of this September, given the high degree of uncertainty surrounding what the Fed will do and its monetary policy outlook for the months ahead.
The combined rise in oil and gas prices and market interest rates is putting strong pressure on the Fed to raise the federal funds rate. However, the balance of power within the FOMC remains uncertain, and the status quo scenario is still possible.
The Fed’s monetary policy announcements tonight will have an impact on all asset classes, including equities, bonds, foreign exchange, commodities, and cryptocurrencies.
Will the Fed be restrictive or accommodative in its monetary policy outlook through the end of the year?
To answer this question, the following fundamental and technical data points will need to be closely monitored tonight:
1. The evolution of the DOT PLOTS
The first signal to watch will be the evolution of the “dot plots,” which provide insight into individual FOMC members’ expectations regarding the future level of policy rates. The key issue will be determining whether the median projection moves toward higher or lower rates by year-end and in 2027. A dot plot higher than expected would be interpreted as a restrictive signal, while a decline in the median would strengthen the scenario of monetary easing. It will also be important to observe the dispersion of the dots, as this will provide an important indication of the degree of division within the FOMC.
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2. The trend in the US 2-year Treasury yield and its positioning relative to the US federal funds rate
The US 2-year Treasury yield will also be a particularly important market indicator. Highly sensitive to monetary policy expectations, it will make it possible to gauge investors’ immediate reaction to the Fed’s statement and projections. Above all, attention should be paid to its spread versus the federal funds rate. If the 2-year yield remains significantly above the policy rate, the market will continue to price in a relatively restrictive monetary policy. Conversely, a rapid decline in the 2-year yield would signal that investors are anticipating more rate cuts over the coming months.
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3. The update to the Fed’s macroeconomic projections, particularly regarding core inflation
Finally, the Fed’s new economic projections will be decisive in understanding its reaction function. Changes in core inflation forecasts will be particularly important in a context marked by rising energy prices. An upward revision to inflation, combined with resilient growth, would reinforce the scenario of a more restrictive Fed. Conversely, if the Fed maintains a disinflationary trajectory while lowering its growth forecasts or showing deterioration in the labor market, the market could anticipate a more accommodative policy.
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It is therefore the combination of these three signals — dot plots, the US 2-year yield, and macroeconomic projections — that will make it possible to determine the Fed’s true message tonight.
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TITradingView Ideas16 Sept