Kent Nishimura | Los Angeles Times | Getty Images
There is little mystery surrounding the Federal Reserve meeting on Wednesday, with markets broadly expecting the central bank to approve its third consecutive three-quarter interest rate hike.
That doesn’t mean there isn’t a lot of intrigue, though.
While the Fed will almost certainly deliver what the market has ordered, it has plenty of other items in its pocket that will grab the attention of Wall Street.
Here’s a quick rundown of what to expect from the Federal Open Market Committee’s rate setting meeting:
Rates: In its ongoing quest to tackle uncontrolled inflation, the Fed will almost certainly approve a 0.75 percentage point hike that will bring its benchmark rate to a target range of 3% -3.25%. This is the highest federal funds rate since the beginning of 2008. Markets are pricing in a slight chance of a full 1 percentage point hike, which the Fed has never done since it started using the federal funds rate. as a main political tool in 1990.
Economic prospects: Part of this week’s meeting will see Fed officials publish a quarterly update on their interest rate and economic outlook. Although the summary of economic projections is not an official forecast, it does provide insight into where policymakers see the various metrics and the interest rate entry. The SEP includes estimates for GDP, unemployment and inflation measured by the price index of personal consumption expenditures.
The “dot plot” and the “terminal rate”: Investors will take a closer look at the so-called dot plot of individual member rate projections for the remainder of 2022 and beyond, with the version of this meeting first extending into 2025. It will include the projection for the “terminal rate,” or the point where officials think they can stop raising rates, which could be the market’s most moving event of the meeting. In June the committee set the terminal rate at 3.8%; it’s likely to be at least half a percentage point higher after this week’s meeting.
Powell presser: Fed President Jerome Powell will hold his customary press conference following the conclusion of the two-day meeting. In his most important remarks since his last July meeting, Powell delivered a short and cutting speech at the Fed’s annual Jackson Hole symposium in late August, underlining his commitment to reducing inflation and in particular his willingness to inflict. ” a little pain “to the economy to make it happen.
The new children arrived nearby: A small wrinkle in this meeting is the contribution of three relatively new members: Governor Michael S. Barr and regional presidents Lorie Logan of Dallas and Susan Collins of Boston.
Collins and Barr attended the previous meeting in July, but this will be their first SEP and dot plot. Although individual names are not attached to the projections, it will be interesting to see if the new members agree with the Fed’s policy direction.
The big picture
Put it all together, and what investors will take a closer look at will be the tone of the meeting, specifically how far the Fed is willing to go to tackle inflation and whether it is concerned about doing too much and getting the economy going. a steeper recession.
Judging by the recent market action and comments, the expectation is for a hawkish hard line.
“Fighting inflation is a job,” said Eric Winograd, senior economist at AllianceBernstein. “The consequences of not fighting inflation are greater than the consequences of fighting it. If that means recession, then that’s what it means.”
Winograd expects Powell and the Fed to stick to the Jackson Hole script that financial and economic stability depends entirely on price stability.
In the past few days, markets have begun to give up on the belief that the Fed will only rise during this year, and then begin cutting perhaps by early or mid-2023.
“If inflation is really stubborn and remains high, they may have to grit their teeth and have a recession that will last for a while,” said Bill English, a professor at Yale School of Management and former Fed senior economist. very difficult time to be a central banker right now, and they will do their best. But it is difficult. ”
The Fed has met some of its tightening financial conditions goals, with retreating stocks, the housing market collapsing to the point of a recession, and Treasury yields rising to levels not seen since the early days of the financial crisis. Household equity fell more than 4% in the second quarter to $ 143.8 trillion, largely due to a decline in the valuation of equity holdings, according to Fed data released in early September.
However, the labor market has remained solid and workers’ wages continue to rise, creating concerns about a wage-price spiral even with falling gasoline costs at the pump. In recent days, both Morgan Stanley and Goldman Sachs have admitted that the Fed may need to raise rates in 2023 to bring prices down.
“The kind of door that the Fed is trying to go through, where they slow things down enough to bring down inflation, but not so much that a recession falls, is a very tight door and I think it has gotten tighter.” English said. There is a corresponding scenario where inflation remains stubbornly high and the Fed must continue to rise, which he believes is “a bad alternative down the road”.