FX.co ★ The process has started, now we need evidence of inflation entering a downward trajectory.

As we have already said in previous articles, now almost the most important indicator for the markets is inflation. It provoked such a movement this week, which we did not see after the Fed meeting when the rate was raised by 0.75%, and after the Nonfarm Payrolls report last week, when the forecast was exceeded twice. Speaking this week, some Fed members positively assessed the July inflation data, calling them "a good first step," but all, as one, focused on the fact that this is only the first step towards the target of 2%. At this time, everyone needs to figure out the question, at what rate will inflation decrease (if at all) at the current size of the Fed's key rate? We saw a 0.6% slowdown in July, but what kind of slowdown will we see at the end of August? If, for example, it is 0.2%, will that be enough for the Fed to talk about a "downward trajectory"?

From our point of view, the key rate should continue to be raised in any case, and it would be better if it also rose by 0.75% in September. The markets have already come to terms with the Fed's aggressive monetary approach anyway, so why move away from it? However, not all Fed members agree with this approach. For example, the head of the San Francisco Federal Reserve, Mary Daly, said this week that she welcomes a 0.5% rate hike in September but does not exclude its growth by 0.75%. The chairman of the Federal Reserve Bank of Chicago, Charles Evans, believes that by the end of the year, the rate should rise to 3.25-3.75%. At the current rate of 2.5%, Evans will not vote for a 0.75% increase in September.

Despite the motley comments of the monetary committee members now, everything will depend on the next inflation report, which will be published on September 13. And the next Fed meeting will be held on September 21. Therefore, the FOMC will have enough time to analyze the consumer price index and thoroughly decide. From our point of view, if inflation decreases by at least 0.5% by the end of August (that is, it falls to 8% y/y), the key rate will be raised by 0.5% to 3%. If inflation decreases by a smaller value (that is, there will be signs of a slowdown in decline), then the rate will rise by 0.75%. For the markets, no drastic and serious changes in monetary policy will happen anyway. Or are traders now ready to buy the dollar only if the step of raising the key rate increases at each Fed meeting? After all, we all saw perfectly well that after the last meeting with an increase of 0.75%, the dollar did not grow. But the US stock market rose, which was supposed to respond with a fall.