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 expecting the central bank to approve its third consecutive three-quarter point interest rate hike.
However, that doesn’t mean there isn’t significant intrigue.
For now The Fed will almost certainly deliver that the market has ordered, there are many other items on his list that will attract Wall Street’s attention.
Here’s a rundown of what to expect from the Federal Open Market Committee’s rate-setting meeting:
Rates: Continuing its efforts to combat runaway inflation, the Fed will almost certainly approve a 0.75 percentage point hike, bringing the benchmark rate up to a target range of 3%-3.25%. This is the Fed’s highest rate since early 2008. Markets are pricing in a slim chance of a full 1 percentage point hike, something the Fed has never done since it began using the Fed rate as its primary policy tool in 1990.
Economic view: As part of this week’s meeting, Fed officials will issue their quarterly update on interest rates and the economic outlook. Although the Summary of Economic Outlook is not an official forecast, it provides insight into where policymakers see various indicators and interest rates headed. The SEP includes estimates of GDP, unemployment, and inflation from the price index of personal consumption expenditures.
“Dot Chart” and “Final Rate”: Investors will be watching most closely the so-called dot chart of individual members’ rate forecasts for the rest of 2022 and beyond, with the 2025 version of that meeting extending for the first time. That includes the forecast for the “final rate,” or when officials think they can stop raising rates, which could be the most market-driven event of the meeting. In June, the committee set the terminal rate at 3.8%; after this week’s meeting, it is likely to be at least half a percentage point higher.
Powell clamp: Chairman of the Fed Jerome Powell will hold his usual press conference after the conclusion of the two-day meeting. In his most notable remarks since the last meeting in July, Powell delivered a short, sharp address at the Fed’s annual symposium in Jackson Hole, Wyoming, in late August, underscoring his commitment to lower inflation and, in particular, his willingness to inflict “some pain” on the economy to make that happen.
New kids on the block: One small wrinkle at this meeting is the presence of three relatively new members: Gov. Michael S. Barr and regional presidents Laura Logan of Dallas and Susan Collins of Boston. Collins and Barr attended a previous meeting in July, but this will be their first SEP and spot story. While individual names are not linked to forecasts, it will be interesting to see if the new members support the Fed’s policy direction.
Put it all together, and what investors will be watching more closely will be the tone of the meeting — specifically, how far the Fed is willing to go to fight inflation and whether it’s worried it’s doing too much and pushing the economy into a deeper recession. .
Judging by latest market action and comments are expected hard line.
“Fighting inflation is the first priority,” said Eric Winograd, senior economist at AllianceBernstein. “The consequences of not fighting inflation are greater than the consequences of fighting it. If that means a recession, then that’s what it means.”
Winograd expects Powell and the Fed to follow a Jackson Hole scenario in which financial and economic stability depends entirely on price stability.
In recent days, the markets have started to give up belief that the Fed will only raise this year then start tapering, possibly by 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 a former senior Fed economist. “It’s a very difficult time to be a central banker and they will do their best. But it’s hard.”
The Fed has achieved some of its fiscal tightening goals, with stocks retreating, falling housing market to the point of recession, and Treasury yields rose 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 lower valuations of stocks, according to the Fed released earlier in September.
However, Art the labor market remained strong and wages continue to rise, raising concerns about spiraling prices and wages, even as gas station costs recede. Both Morgan Stanley and Goldman Sachs have acknowledged in recent days that the Fed may have to raise rates through 2023 to lower prices.
“The door that the Fed is trying to get through when they’re slowing things down to reduce inflation but not enough to count as a recession is a very narrow door, and I think it’s gotten narrower,” English said. There is a corresponding scenario where inflation remains stubbornly high and the Fed has to continue hiking, which he says is “a very bad alternative going forward.”