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The Fed convenes for the first time since Jerome Powell announced the shift to AIT. No adjustment to policy is expected but the dot plot could be lower notably lower.

FED 1

When?

Wednesday 16th September (6pm GMT)


What to expect
The Federal Reserve Open Market Committee convenes this week for the first time since Fed Chair Jerome Powell announced that the central bank would shift towards average inflation targeting (AIT).

The central bank is not expected to adjust policy, despite Congress’ failure to agree to additional fiscal stimulus. Instead further clarification surrounding AIT and updated economic forecasts could drive both the dollar and the outlook for S&P500.

The Summary of Economic Projections (SEP) will be in focus, with inflation and growth forecasts set to dominate as well as the dot plot and what the new Average Inflation Target policy means there.

AIT
At the Jackson Hole symposium, Fed Chair Jerome Powell announced a shift in policy framework to allow for inflation to overshoot the 2% target for extended periods of time, to make up for the long periods of time that it has been under the 2% target. Investors will be looking for further clues on the targeting method and more broadly speaking clarification surrounding the method. 

The change in policy targeting is likely to reflected in the Fed’s dot plot, release in the SEPs. The dot plot could show a notable lowering of interest rate expectations over the longer term. Previously the Fed Funds had seen interest rates normalising after 2022.

Lower interest rate expectations could dampen demand for the US Dollar whilst boosting the outlook for riskier assets such as stocks, potentially pushing the S&P500 and the tech heavy Nasdaq back to recently achieved highs.

Comments to this end from the Fed could calm investors’ concerns over the lack of stimulus from Congress at least for the near term.

US Dollar Index
After dropping steeply over the past 4 months, US Dollar Index was showing some signs of rebounding in September, advancing 0.66% last week. This week, DXY is back trading on the back foot, shedding -0.3% and breaking through key support at 93.50, to strike a low of 92.88 on Monday.

The 4 hour chart shows the steep sell off coming into August. However, last month was more abut consolidation, only edging marginally lower compared to previous months.
With the price heading southwards, a breakthrough 92.70 could be considered a bearish signal opening the door to 91.75.
On the flip side a break above 93.65 is needed to negate the current bearish trend.



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