This week has been fascinating for financial markets: stock markets have performed quite well despite global interest rate hikes and some disappointing tech earnings in the US, while the US Dollar Index continued to decline from late September’s highs. These movements are perhaps only more surprising considering that key data on the US economy was released both yesterday and today, and the chances of it further emboldening the Fed are plausible. With the Federal Reserve scheduled to adjust the Federal Funds Rate (a key interest rate in the US) on Wednesday next week, and full-blown recession still looming in the minds of investors, it is worth unpacking this fresh data in order to ask: what will the Fed do?

Consideration #1: Surprising GDP Growth

Yesterday morning at 8:30 am Eastern Time, the US Bureau of Economic Analysis released some shocking information. Quarter-over-quarter Gross Domestic Product (GDP) in the US, a measure of economic output, was estimated to have grown by a whopping 2.6% from July through September, even more impressive than the 2.3% which had been forecasted. This is a welcome respite for a country that had just met the criteria for a technical recession (two consecutive quarters of negative GDP growth). However, this remarkably positive growth may leave the Federal Reserve only feeling more at peace with their monetary tightening regiment, since GDP contractions may have kept them somewhat cautious about the severity of their rate hikes.

Consideration #2: High Core PCE Index

This morning at 8:30 am ET, the Bureau of Economic Analysis also released new inflation data. The month-over-month Core Personal Consumption Expenditures (PCE) Index, which measures the cost of goods and services purchased by consumers (excluding volatile food and energy prices), rose by 0.5%, perfectly meeting market expectations. While not bullish in the sense of exceeding forecasts, context is crucial: not only are these figures high, but they are also identical to last month’s increase. Considering that the Core PCE Index is the Fed’s preferred measure of inflation, it seems likely that the FOMC, the Fed’s policy-making committee, could interpret these numbers as an indication that recent rate hikes have been insufficient for quelling inflation.

Consideration #3: High Personal Spending

The Bureau of Economic Analysis also reported higher than expected personal spending this morning, clocking in at 0.6% month-over-month, much higher than the 0.4% forecast. Though not holding the same significance as other indicators and measures of inflation, this increase marks a pattern, with personal spending similarly beating market expectations with a 0.6% increase the previous month. Considering that the intention behind the Fed’s interest rate hikes is to curb consumer demand by limiting borrowing and spending, hot personal spending numbers help indicate that their goals have yet to be realized.

Likelihood of Fed Decisions

In light of these latest developments in economic fundamentals, the odds of continued Fed hawkishness seem only more likely. Between a return to positive economic growth, persistently high changes in core prices, and historically hot labor markets and consumer spending, a 75 basis point rate hike seems all but certain next week. A full 100 basis point hike, while not currently forecasted, may not be off the table either, though they may refrain due to concerns about inflation data as lagging indicators (rendering current data somewhat unreliable for exhaustive Fed decision-making).

Conversely, some analysts are predicting the Fed easing up on their contractionary monetary policy aggression soon. The Employment Cost Index (ECI), administered by the US Department of Labor, revealed that wages in the private sector grew by 1.2% in Q3; though still remarkable, it is a decline from the 1.6% increase in the previous quarter. While these slower increases in pay could theoretically bring core inflation a bit lower soon, these numbers are still incredibly hot. Considering that the Fed has made it clear that they are willing to err on the side of hawkishness for the sake of returning annual inflation to 2% (down from the current rate of 8.2%), the notion that a Fed pivot towards smaller hikes will be coming soon seems rather premature.

My Biases

Personally, I am anticipating further bouts of Fed hawkishness, and a corresponding return to bullish momentum for USD across major pairs. Likewise, I am expecting that the bear market for equities is not over, and that the recent rally will only make the Fed more comfortable indulging in rate hikes. Regardless, this coming Wednesday’s FOMC Statement and press conference will keep us updated on the Fed’s vision for the near future. The Statement and rate hike will be made known at 2 pm ET on Wednesday, November 2^nd, with the press conference immediately to follow. The EdgeFinder, A1 Trading's market scanner which aids traders by providing supplemental analysis, is currently bullish on both USD and the S&P 500.