Inflation Uncertainty Clouds Fed Meeting Expectations

Investors are heading into this week's Federal Reserve policy meeting cautiously positioned due to inflation uncertainty clouding the outlook for interest rates. Benchmark rates are expected to remain unchanged in the 3.50-per-cent-3.75-per-cent range at the end of a two-day meeting on Wednesday.

Despite slowing U.S. consumer inflation to 3.5 per cent in June, which is still well above the Fed's 2-per-cent target, ongoing U.S.-Iran tensions threaten another oil-driven rebound in price pressures.

Portfolio managers prefer high-quality assets and avoid large directional bets, emphasizing liquidity and flexibility as they wait for more inflation and employment data that could shed more light on the Fed's next move. 'I don't think that this is an environment that calls for meaningful positioning,' said Jason Granet, chief investment officer at BNY.

Investors like Granet expect rates to move higher over time but believe trying to monetize that view via a large wager on this week's decision is not prudent. U.S. rate futures priced in a 36 per cent chance of a hike this week, according to the CME's FedWatch, up from 16 per cent a week earlier.