Construction industry workers beyond your Marriner S. Eccles Federal Reserve Building, photographed on Wednesday, July 27, 2022 in Washington, DC.
Kent Nishimura | LA Times | Getty Images
There’s very little mystery surrounding Wednesday’s Federal Reserve meeting, with markets widely expecting the central bank to approve its third consecutive three-quarter point interest hike.
It doesn’t mean there is not considerable intrigue, though.
While the Fed probably will deliver what the marketplace has ordered, it has a lot of other items on its docket which will catch Wall Street’s attention.
Here is a quick rundown of what things to expect from the rate-setting Federal Open Market Committee meeting:
Rates: In its continuing quest to tackle runaway inflation, the Fed likely will approve a 0.75 percentage point hike which will take its benchmark rate up to target selection of 3%-3.25%. That is the highest the fed funds rate has been since early 2008. Markets are pricing in hook chance for a complete 1 percentage point increase, something the Fed hasn’t done because it started utilizing the fed funds rate as its primary policy tool in 1990.
Economic outlook: Section of this week’s meeting will dsicover Fed officials issue a quarterly update of these interest and economic outlook. As the Summary of Economic Projections isn’t the official forecast, it can provide insight into where policymakers see various metrics and interest levels heading. The SEP includes estimates for GDP, unemployment and inflation as gauged by the non-public consumption expenditures price index.
The “dot plot” and the “terminal rate”: Investors will undoubtedly be most closely watching the so-called dot plot of individual members’ rate projections for the others of 2022 and subsequent years, with this particular meeting’s version extending for the very first time into 2025. Contained in that’ll be the projection for the “terminal rate,” or the stage where officials think they are able to stop raising rates, that could function as most market-moving event of the meeting. In June, the committee put the terminal rate at 3.8%; it’s apt to be at least half of a percentage point higher third , week’s meeting.
Powell presser: Fed Chairman Jerome Powell will hold his usual news conference following conclusion of the two-day meeting. In his perhaps most obviously remarks because the last meeting in July, Powell delivered a brief, sharp address at the Fed’s annual Jackson Hole, Wyoming, symposium in late August emphasizing his commitment to decreasing inflation and specifically his willingness to inflict “some pain” on the economy to create that happen.
New kids on the market: One slight wrinkle as of this meeting may be the input 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 prior meeting in July, but this is their first SEP and dot plot. While individual names aren’t mounted on projections, it’ll be interesting to see if the new members are up to speed with the direction of Fed policy.
Put everything together, and what investors will undoubtedly be watching most closely would be the meeting’s tone specifically what lengths the Fed is ready to head to tackle inflation and whether it’s worried about doing an excessive amount of and taking the economy right into a steeper recession.
By recent market action and commentary, the expectation is for a hawkish hard line.
“Fighting inflation is job-one,” said Eric Winograd, senior economist at AllianceBernstein. “The results of not fighting inflation are higher than the results of fighting it. If which means recession, then that’s what this means.”
Winograd expects Powell and the Fed to adhere to the Jackson Hole script that financial and economic stability are wholly influenced by price stability.
In recent days, markets have begun to relinquish the belief that the Fed is only going to hike through this season then start cutting possibly by early or mid-2023.
“If inflation is actually stubborn and stays high, they could have to grit their teeth and also have a recession that lasts for some time,” said Bill English, a professor at the Yale School of Management and former senior Fed economist. “It is a very tough time to become a central banker at this time, and they’re going to do their finest. But it’s hard.”
The Fed has accomplished a few of its goals toward tightening financial conditions, with stocks in retreat, the housing marketplace slumping to the stage of a recession and Treasury yields surging to highs not seen because the start of the financial meltdown. Household net worth fell a lot more than 4% in the next quarter to $143.8 trillion, due largely to a decline in the valuation of currency markets holdings, in accordance with Fed data released earlier in September.
However, the labor market has stayed strong and worker pay continues to go up, creating worries over a wage-price spiral despite having gasoline costs at the pump down considerably. In recent days, both Morgan Stanley and Goldman Sachs conceded that the Fed may need to raise rates into 2023 to create down prices.
“The type of door that the Fed is wanting to obtain through, where they slow things down enough to obtain inflation down however, not so much they result in a recession is an extremely narrow door and I believe it has gotten narrower,” English said. There is a corresponding scenario where inflation stays stubbornly high and the Fed must keep raising, which he said is “an extremely bad alternative later on.”