The Federal Reserve is widely expected to keep its key policy rate unchanged when it unveils its latest policy statement later today in Washington.
But the odds of a final rate hike this year can't be discounted as the economy continues to defy recession predictions and the job market remains resilient.
That likely puts an even greater emphasis on today's so-called dot plots, formally the Fed's Summary of Economic Projections, which are set to be released alongside the central bank's interest rate decision at 2 p.m. U.S. Eastern Time.
The projections, which include a vast array of views on growth, inflation and unemployment from members of the Fed's rate-setting Open Markets Committee, are likely to reflect the stronger-than-expected economic gains over the summer and suggest that consumer-price pressures are easing.
That should undoubtedly be enough to keep rates unchanged at their current rate of between 5.25% and 5.5%. But it won't quite snuff out the chances of a final rate increase in November, based partly on comments from Chairman Jerome Powell late last month at the Fed's central bank summit in Jackson Hole, Wyo.
Powell: '2 months of good data are only the beginning'
"Two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal" of an inflation rate of 2%, Powell said. "We can’t yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters.”
Last month, second-quarter GDP was revised modestly lower, to a gain of 2.1%, but the Atlanta Fed's real-time tool suggests a current growth rate of 4.9% .
Job growth is slowing but remains solid, with another 187,000 positions added last month, mostly in the private sector. Wages were still growing at just ahead of inflation despite big new pay deals for United Parcel Service (UPS) -), various pilots' unions and the negotiation between the Big Three automakers and the United Auto Workers Union.
Core CPI is also holding at the lowest levels since March of last year, at 4.3%, even as headline prices quickened for a second consecutive month in August, to 3.7%.
Clear Street analyst sees 'a hawkish pause'
"We are in the camp that Powell comes out with a hawkish pause on Wednesday, as there will not be a rate hike, but will continue to buy optionality by releasing a higher dot plot and alluding to the fact that every meeting is live until the Fed hits their 2% inflation target," said Victor Masotti, director of repo trading at Clear Street.
Bond markets seem to agree, with two-year note yields rising some 28 basis points (0.28 percentage point) since the Fed's last rate hike in July, pegging the paper at 5.075% heading into today's decision.
That suggests markets are consolidating their "higher rates for longer" consensus. Traders are betting Powell keeps his options open on whether to increase rates, while they push out bets on a cut in 2024 to July and possibly later.
Wild card in inflation debate: oil prices
One wild card in this respect is the price of oil, which hit a one-year high of $95 on international markets yesterday and has risen more than 35% since the Fed's last economic projections in June.
"Policymakers have to be ready to deal with exogenous shocks," said Ian Shepherdson of Pantheon Macroeconomics.
"For the record, we think the oil-driven increase over the next few months will have only a very modest impact on core inflation, mostly via airline fares and distribution costs. But a further hefty increase towards, say, $110, would be a significantly adverse development and would increase the risk of a further rate hike."
At present, CME Group's FedWatch suggests only a 27% chance that the Fed will lift rates by another quarter-point in November – down from just over 50% at the end of last month – with the odds of a hike in December at around 34.1%.
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