Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a Federal Open Market Committee meeting at the Federal Reserve in Washington, DC, on July 26, 2023.
Saul Loeb | AFP | Getty Images
As has often been the case, this week’s Federal Reserve meeting will be less about what policymakers do now than about what they expect to do in the future.
Currently, there is virtually no chance that the US central bank will choose to raise its interest rates. According to data from CME Group, markets are pricing in just a 1% chance of what would be the twelfth rise since March 2022.
But this week’s meeting, which concludes Wednesday, will include the Fed’s quarterly update on what it expects for a slew of key indicators: interest rates, gross domestic product, inflation and unemployment.
That’s where the tension lies.
Here’s what to expect.
The Fed won’t tinker with its key interest rate, which determines what banks charge each other for overnight lending but also ripples through many forms of consumer debt.
Historically, and especially under Chairman Jerome Powell, the Fed has not liked to criticize the markets, especially when expectations are so heavily in one direction. The fund interest rate is a condition for remaining within the current bandwidth of 5.25%-5.5%, the highest level since the beginning of the 21st century.
However, there is a widespread belief that the Fed will ensure that the market knows not to make assumptions about the future.
“There will probably be a pause here, but there is a distinct possibility that the November meeting is, as they say, a live meeting. I don’t think they are ready to say, ‘We are ready now,'” says Roger Ferguson, a former Fed vice chairman, said in an interview this week on CNBC’s “Squawk Box.”
“Now is the time for the Fed to move very carefully,” he added. “By no means should they say we’re completely done, because I don’t think they really know that yet, and I think they want the flexibility to do one more if they need to.”
The dot plot
One way the central bank can communicate its intentions is through its dot plot, a grid that anonymously displays individual members’ expectations of future interest rates.
The markets will be looking for subtle shifts in the points to understand where officials see things going.
“I think they’ll keep that preference for higher interest rates in there and signal that they’re willing to raise rates further if the data shows that inflation isn’t slowing as they expect, or if the labor market holds up.” too tight,” said Gus Faucher, chief economist at PNC Financial Services Group.
One key ‘tell’ market participant will focus on: the ‘longer term’ median point, which in Wednesday’s case will be the projection beyond 2026. At the June meeting, the median expectation was 2.5%.
Should this rise even by a quarter of a percentage point, it could be a “tacit” signal that the Fed will be content to allow inflation to rise above its 2% target, potentially roiling markets. said Joseph Brusuelas, chief economist at RSM.
‘We are laying the foundation to prepare our clients for the inflation targets we think [will] going up,” he said.
Every quarter, the Fed updates its Summary of Economic Projections, or the outlook for interest rates, inflation, GDP and unemployment. Think of the SEP as the central bank laying a trail of policy breadcrumbs – a trail that unfortunately often leaves much to be desired.
In recent years in particular, the projections have been strikingly wrong as Fed officials misread inflation and growth, leading to a number of dramatic policy adjustments that have kept markets off balance.
In this week’s iteration, markets largely expect the Fed to show a sharp upgrade in its June projection for GDP growth this year, along with cuts to its outlook for inflation and unemployment.
“The Fed will have to nearly double its growth prospects,” Ellen Zentner, chief U.S. economist at Morgan Stanley, said on CNBC’s “Worldwide Exchange” on Tuesday.
While the SEP and point chart will draw the most attention, potential adjustments to the post-meeting statement may also be a point of interest.
Zentner suggested that the Fed could change some of its characterizations of policy and its view of the economy. One possible adjustment from the July statement could be the sentence: “In determining the extent of additional policy tightening that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the delays and how monetary policy affects economic activity and inflation, and economic and financial developments.”
Removing the word “additional,” she said, would send a signal that Federal Open Market Committee members at least believe no more rate hikes will be necessary.
A second potentially powerful change would be if the Fed were to remove the word “very” from the sentence “The Committee remains very alert to inflation risks.” This could indicate that the Fed is less concerned about inflation.
“These are small adjustments that should not be taken lightly, and they would be small steps toward stopping the walking cycle,” Zentner said.
The press conference
Following the release of the statement, dot plot and SEP, Powell will take the stage to answer questions from reporters, an event that typically lasts about 45 minutes.
Powell is using the conference to amplify what the FOMC has already done. He also sometimes has a slightly different twist than what comes out of the official documents, making events unpredictable and potentially market-moving.
Markets are assuming that the Fed has completed this rate hike cycle, leaving only a 30% chance of a rate hike in November. If the chairman does something to rid the market of that sentiment, it would make sense.
However, Zentner expects the central bank to follow market thinking.
“We really believe the Fed is done here,” she said. “They just don’t know it yet.”