Strengthening of USD likely to weigh on Fed's forecasts

The strengthening of the USD is likely to weigh on the Fed's forecasts the most. While the fall in energy prices may be expected to provide a boost, the sell-off in the equity markets should offset that. 

"At Jackson Hole, Vice Chair Fischer argued that a 10% appreciation would exert a 0.3% drag in the first year but almost 0.5% in the second year. This suggests that the drag from the trade channel can persist through 2016 and that there is room for those growth forecasts to fall", says Barclays. 

Similarly, on the inflation front, y/y core PCE has drifted further away from the target, the USD has strengthened and energy prices have fallen since the June meeting. 

"All of these are likely to weigh on the Fed's 2016 inflation forecasts, which at 1.75% were already high relative to the Fed staff forecast of 1.6% at the June meeting. On the labor market front, the unemployment rate has fallen sharply and at 5.1% is already through the Fed's YE 15 forecast", added Barclays. 

At the same time, however, there has been no uptick in wage growth this year (both ECI and AHE have remained close to 2% in y/y terms). The Fed has been steadily paring back its NAIRU estimate since the middle of 2012, and the next meeting is unlikely to be an exception.