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.”
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
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.
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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.
“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.
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.”