Fed to Validate or Challenge Market Pricing?

The Fed and BOE are likely to appear less hawkish than current market pricing implies, leaving USD and GBP vulnerable to dovish repricing.

• The FOMC is expected to raise rates by 25 basis points to 3.75%-4.00% after five consecutive holds, while Fed funds futures assign a 94% probability to the move.
• Markets price almost 100 basis points of additional US tightening over the next twelve months, but BBH argues that slowing wage growth and an already restrictive policy stance against a roughly 3.00% neutral rate do not justify an aggressive cycle.
• August US nominal retail sales are expected to rebound 0.8% month over month after falling 0.6% in July, while control-group sales are forecast to rise 0.5% after declining 0.4%.
• UK headline CPI accelerated to 3.1% year over year in August from 2.9% in July, while core CPI remained at 2.6% and services CPI at 3.4%.
• The BOE is expected to keep Bank Rate at 3.75%, even though swaps price 100 basis points of hikes over the next twelve months; BBH sees limited scope for tightening because the economy is below capacity, rates are near the top of the estimated 2%-4% neutral range, and fiscal policy is likely to become more restrictive.

Takeaway: A hawkish Fed outcome could support USD and lower long-term Treasury yields, but the asymmetric risk is dovish because expectations are already aggressive; GBP is similarly exposed if the BOE challenges the market’s tightening path.