• The Federal Reserve is widely expected to lower the policy rate after the September meeting.
• The revised Summary of Economic Projections and Fed Chairman Powell’s remarks could provide important clues about the rate outlook.
• The US Dollar faces a two-way risk depending on the size of the interest rate cut.

The US Federal Reserve (Fed) will announce monetary policy decisions following the September policy meeting and release the revised Summary of Economic Projections (SEP), the so-called dot plot, on Wednesday. Market participants widely anticipate that the US central bank will lower the policy rate, but the size of the cut is up in the air.

The CME FedWatch Tool shows that markets are currently pricing in a nearly 60% probability of a 50 basis points (bps) rate cut against a nearly 40% chance of a 25 bps reduction. The market positioning suggests that the US Dollar (USD) faces a two-way risk heading into the event.

The US Bureau of Labor Statistics reported last week that the core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose 0.3% on a monthly basis in August. This reading followed the 0.2% increase recorded in July and came in above the market expectation of 0.2%. Following this report, investors saw a diminishing chance of a large rate cut.

In an article published a day later, on September 12, The Wall Street Journal reporter Nick Timiraos, who is widely seen as a “Fed insider,” wrote that the size of the Fed’s rate cut at the September meeting will be a close call. Additionally, the annual producer inflation, as measured by the change in the Producer Price Index (PPI), declined to 1.7% in August from 2.1% a month before. Markets shifted their view toward a 50 bps cut, which caused the US Dollar to come under renewed selling pressure.