Construction workers outside the Marriner S. Eccles Federal Reserve Building, pictured Wednesday, July 27, 2022, in Washington, DC.
Kent Nishimura | Los Angeles Times | Getty Images
There isn’t much mystery surrounding the Federal Reserve’s meeting on Wednesday, with markets widely expecting the central bank to approve its third consecutive three-quarter point interest rate hike.
That’s not to say there isn’t considerable intrigue, however.
While the Fed will almost certainly deliver what the market has ordered, it has plenty of other items on its docket that will draw Wall Street’s attention.
Here’s a quick rundown of what to expect from the rate-setting Federal Open Market Committee meeting:
Tip: In its continued quest to tackle runaway 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% to 3.25%. This is the highest the fed funds rate has been since early 2008. Markets have a slight chance of a 1 percentage point hike, something the Fed has never done since it started using the fed funds as the main policy tool in 1990.
Economic outlook: As part of this week’s meeting, Fed officials will release a quarterly update on their interest rate and economic outlook. While the Summary of Economic Projections is not an official forecast, it does provide insight into where policymakers see various metrics and interest rates. The SEP includes estimates of GDP, unemployment and inflation as measured by the personal consumption expenditure price index.
The ‘dot plot’ and ‘terminal rate’: Investors will be taking a closer look at the so-called dot plot of individual member rate projections for the rest of 2022 and beyond, with the release of this meeting, which for the first time will extend to 2025. It will include the projection of the “terminal rate,” or the point at which officials believe they can stop raising rates, which could be the event that more moves the meeting market. In June, the committee placed the terminal rate at 3.8%; it is likely to be at least half a percentage point higher after this week’s meeting.
Powell presser: Fed Chairman Jerome Powell will hold his usual press conference after the conclusion of the two-day meeting. In his most prominent comments since the last meeting in July, Powell delivered a short and punchy speech at the Fed’s annual Jackson Hole symposium in late August, stressing his commitment to reducing inflation and, in particular , his willingness to inflict “a little pain” on the economy. for this to happen.
New Kids on the Block: A slight wrinkle in this meeting is the input of three relatively new members: Gov. Michael S. Barr and regional chairmen 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 points plot. While individual names are not attached to the projections, it will be interesting to see whether the new members agree with the Fed’s policy direction.
The general picture
Put it all together, and what investors will be watching most closely will be the tone of the meeting, specifically how far the Fed is willing to go to tackle inflation and whether it’s worried about doing too much and bringing the economy to a deeper recession.
Judging by the recent market action and comments, the expectation is for a tough, 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, 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 recent days, markets have begun to give up on the belief that the Fed will only hike this year and then begin cutting possibly in early to mid-2023.
“If inflation is really stubborn and stays high, they may just have to grit their teeth and have a recession that lasts for a while,” said Bill English, a professor at the Yale School of Management and former senior economist at the Fed. “It’s a very difficult time to be a central banker right now, and they’re going to do their best. But it’s difficult.”
The Fed has achieved some of its goals to tighten financial conditions, with stocks retreating, the housing market falling to the point of a recession and Treasury yields rising to highs not seen since the early days of the financial crisis. Household net worth fell more than 4% in the second quarter to $143.8 trillion, largely due to a drop in the valuation of stock holdings, according to Fed data published at the beginning of September.
However, the labor market has remained strong and wages for workers continue to rise, raising concerns about a wage-price spiral even as gasoline costs at the pump recede. In recent days, both Morgan Stanley and Goldman Sachs admitted that the Fed may have to raise rates through 2023 to lower prices.
“The kind of door that the Fed is trying to get through, where they slow things down enough to bring down inflation, but not so much as to have a recession, is a very narrow door and I think it’s gotten narrower,” English said . There is a corresponding scenario in which inflation remains stubbornly high and the Fed has to keep hiking, which he said is “a very bad alternative going forward.”