USA stock index futures were slightly higher on Tuesday, ahead of the Federal Reserve's two-day policy meeting, which would give investors clues on the timing of the next US interest rate hike.
Against a basket of currencies, the USA dollar edged towards 2-1/2-year lows hit earlier this month as investors waited to see whether the Fed this afternoon would signal tighter monetary policy or hold off because of tepid inflation data.
An announcement that the Fed will start unwinding its debt would mark yet another milestone in an economic recovery now in its ninth year.
Then there are geopolitical jitters emanating from North Korea and the recent departure of deputy governor Fischer means the Fed could be in peril of having its "head lopped off" when Janet Yellen's term also comes to an end in January 2018.
Clearly, if the "dots" do move lower, it will negatively impact on the Dollar, which is highly correlated to Fed Fund rate expectations. "Ideally it could reach interest rates of at least 2% by the middle of next year, up from 1.25% today".
Yesterday, President Donald Trump escalated his rhetoric on North Korea, threatening to "totally destroy" the country if it does not back down on its nuclear ambitions. Last week, Trump said of Yellen, "I like her, and I respect her" but added, "I haven't made a decision yet". But others are more concerned about financial market risks that could build up if rates remain low too long.
ING agree with this view and note how, "broader U.S. financial conditions are now clearly becoming less responsive to adjustments in the short-term policy rate", ie the easier monetary conditions from low rates are not generating as much inflation as would normally be expected. That's because it's too soon for Fed officials to abandon that framework for forecasting price pressures, said Josh Wright, chief economist at iCIMS Inc.in Matawan, New Jersey. "Clearly we are at a very tricky moment in terms of what's been going on with inflation data and what's going to happen with the next rate hike, but there's enough runway that she doesn't need to" lay out all her thinking, he said. A Reuters poll sees headline inflation ticking up to 4.9 percent year-on-year from 4.6 percent. The projection for unemployment will show that the central bank has achieved its 4.6 percent target for full employment: The jobless rate is at 4.4 percent, near a 16-year low. Economists surveyed by Bloomberg see the long-run median edging down to 4.5 percent.
Nuclear threat at highest level since Cold War — UN chief
He said Mr Trump, who also vowed to "totally destroy" North Korea unless it backs down, was stating the reality of the situation. Warning Pyongyang to back down from its nuclear challenge, Donald Trump threatened to eliminate a United Nations member state.
The FOMC's post-meeting statement may also acknowledge the economic impact of Hurricane Harvey, which hit Texas in late August, according to Michael Feroli, chief United States economist at JPMorgan Chase & Co.in NY.
"There is a good chance the growth assessment could mention the effects of Harvey but, like the post-Katrina statement, largely dismiss the chance that it poses "a more persistent threat" to growth", Feroli wrote in a September 15 note to clients.
While it is tipped to keep borrowing costs on hold, the bank's plans for cutting back crisis-era bond-buying stimulus and any signals for the future of interest rates will be pored over.
"What's particularly striking is how little markets care", Goldberg said.
Balance sheet reduction, or Quantitative Tightening (QT) as it may become known, is the other thing to watch for.
The "neutral" rate is the appropriate rate for the level of inflation, which has moved structurally lower over time.