Preview: September 19-20 US Federal Reserve Meeting, FOMC To Pause Rate Hikes

The US Federal Reserve is likely to stay on hold at its September 19-20 meeting and Chairman Jerome Powell's message should be balanced, similar to Jackson Hole, according to BofA Securities.

"We expect the Fed to maintain the target range for the federal funds rate at 5.25-5.5% at the September FOMC meeting," said Michael Gapen, US economist at BofA Securities.

"This outcome would be consistent with both recent Fed communications and current market pricing. We expect no change to the Fed's balance sheet policies."

The Fed is expected continue to allow assets to roll off its $8.1 trillion balance sheet.

The FOMC is trying to navigate a "soft landing" for the US economy in which it drops inflation down to around 2% without triggering an economic recession.

The S&P 500 has gained 17.3% year-to-date on optimism that inflation is trending in the right direction, but several red flags have popped up in recent weeks, indicating the Fed's battle with inflation may finally be starting to take a meaningful toll on the economy, Forbes reported.

"Powell is likely to note up front that the job is not done on inflation and the Fed will stay the course in order to get inflation back to 2%," Gapen from BofA Securities added.

"Powell will continue to emphasize data dependence. November is a close call, but we retain our expectation for one last 25 basis point hike."

The concern is that economic softness could go too far and increased the chances of recession. Given this risk and the positive developments on inflation and labour costs, the Fed may be on hold for a number of months with the data flow gradually weakening the case for a November or December rate hike - which the market itself only gives around a 50:50 chance.

"We simply cannot see the point of the Fed softening its stance on the outlook for policy and give the markets the green light to sell the dollar and drive Treasury yields lower given this will undermine their fight against inflation," said James Knightley, chief international economist at ING.

"At the same time, a 25 bps hike would be such a shock it could be seen as inconsistent with the Fed's attempt to engineer a soft landing and would hurt risk appetite."