The Federal Reserve is poised to raise interest rates to the highest level since 2008 and forecast further increases as Chair Jerome Powell (picture) leads efforts to curb harmful inflation.
The Federal Open Market Committee is expected to raise rates by 75 basis points on Wednesday for a third straight meeting, delivering the most aggressive tightening since Paul Volcker led the central bank in the early 1980s.
The decision, as well as quarterly forecasts, will be announced at 2 p.m. in Washington. Powell will hold a press conference 30 minutes later.
Markets will home in on policymakers’ projections of monetary tightening in the “dot plot” for year’s end and 2023, reflecting Powell’s strategy that rates will need to be higher for longer.
While investors are pricing rates peaking near 4.5% next March, Fed officials have been vague about their terminal rate plans.
“Markets are going to be focused mostly on the dots,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “We are getting a pulling back of the curtain of what the Fed is thinking longer term.”
Fed leaders will probably debate the possibility of a 100 basis-point hike at the meeting after core consumer prices rose by more than expected in August. Markets are putting odds of such a hike at nearly 20%, with one Wall Street forecaster, Robert Dent of Nomura Securities, even calling it a likely outcome.
At the last meeting in July, Powell left the door open to such a move when he said “we wouldn’t hesitate to make an even larger move than we did today if the committee were to conclude” that was appropriate.
“I think it’s a close call,” said Roberto Perli, head of global policy research at Piper Sandler & Co. “A good discussion is in order here. They have been behind the curve systematically. They have to think getting in front of the curve would be good.”
Summary of Economic Projections
The updated Summary of Economic Projections will include policymakers’ first forecasts for 2025. While most of the investor focus will be on the rate forecast for this year and next, projections may also show the FOMC expects to keep rates higher for longer, with rates coming down only to 3.6% in 2024 and 2.9% in 2025.
Powell has emphasized the Fed is trying to reduce growth to below its long-run trend to lower demand in line with Covid-constrained supplies. Reflecting this, the committee is likely to slash its growth estimates for 2022 and 2023 and could edge up its unemployment rate estimates for 2023 and 2024, according to economists surveyed by Bloomberg.
With inflation persisting more than expected, the Fed could project inflation returning to its 2% target only in 2025.
The Fed is likely to reiterate that recent indicators of economic growth have softened while continuing to pledge “ongoing” increases in interest rates without specifying the size. Some economists say the statement could include that the pace of increases will slow at some point, reflecting Powell’s public comments in July and at the Fed’s Jackson Hole conference in August.
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Following last week’s disappointing consumer price index, which showed core inflation, excluding food and energy, accelerating, the committee could also choose to voice more concern on inflation, said Derek Tang, an economist at LH Meyer in Washington.
“Watch for upgrades to the wording on inflation: for example, inflation is higher and moving further away from our objective,” he said.
Most economists expect a unanimous decision this month, with the FOMC keeping a united front behind Powell’s fight against inflation. If there is a dissent, it’s most likely to come from St. Louis Fed President James Bullard, who has dissented as a hawk this year, or Kansas City Fed President Esther George, who has dissented in a dovish direction.
“There seems to be a range of views on the committee” on whether to step down to a 50 basis-point hike in November or keep going at 75 basis points, said Julia Coronado, president of MacroPolicy Perspectives LLC.
The Fed this month has stepped up its shrinking of its US$8.8 trillion balance sheet to an annual pace of about $1.1 trillion. Some Fed officials have favoured the sale of mortgage-backed securities as part of the effort to restore the balance sheet to a more normal level. No decision on this is expected this meeting.
Powell’s July press conference was widely interpreted on Wall Street as dovish as he said the central bank was moving away from explicit forward guidance on rates, and he expected the pace of hikes to slow at some point. Fed officials spent the following weeks clarifying their view that they weren’t stepping back from the inflation fight.
With that in mind, Powell could try to ensure his message is viewed as suitably hawkish and clear this meeting.
“What matters the most is what Powell will say,” Perli said. “The last few press communications there have been communication hiccups. The concern I hear is that Powell will say something that will lead the market to believe to something that is not accurate. People are worried about a repeat of that experience.”