- There is virtually no chance that the US central bank will choose to raise its benchmark borrowing rate at the end of its two-day meeting on Wednesday.
- The meeting will present the Fed’s quarterly updates on a range of key indicators, including interest rates, gross domestic product, inflation and unemployment.
- There is widespread belief that the Fed will make the market understand that it shouldn’t speculate about what’s next.
Federal Reserve Chairman Jerome Powell speaks during a press conference after the Federal Open Market Committee at the Federal Reserve Board on July 26, 2023 in Washington, DC.
Saul Loeb | AFP | Getty Images
As has often been the case, this week’s Federal Reserve meeting will be less about what policymakers are doing now and more about what they expect to do in the future.
At this point, there is virtually no chance that the US central bank will choose to raise the benchmark borrowing rate. The market is pricing in just a 1% chance of the 12th interest rate hike since March 2022, according to the report. CME Group data.
But at this week’s meeting, which concludes on Wednesday, the Fed is expected to provide quarterly updates on its forecasts for a range of key indicators, including interest rates, gross domestic product, inflation and unemployment.
That’s the suspense.
Let’s take a look at what you can expect here.
The Fed won’t tinker with the key funds rate, which sets how much banks charge each other for overnight loans, but this also spills over into many forms of consumer debt.
Historically, especially under Chairman Jerome Powell, the Fed doesn’t like to go against the market, especially when expectations are so strong in one direction. Funds rates are key to staying within the current target range 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 make the market understand that it should not speculate about what’s next.
Roger Ferguson said: “There’s likely to be a pause here, but there’s a clear chance that the November meeting will be, as they say, a live meeting. I don’t think they’ll be ready to say ‘it’s over’. I don’t think there is,” he said. The former Fed vice chairman said this week in an interview on CNBC’s “Squawk Box.”
“This is a time for the Fed to act very carefully,” he added. “They should never say we’re completely done, because I don’t think they really understand it yet and they want to have the flexibility to do one more thing if they need to.” Because I think so.”
One way the central bank communicates its intentions is through the dot plot, a grid that anonymously lays out individual members’ expectations for future interest rates.
Markets will be looking for subtle changes in points to understand where authorities see things going.
“I think they will maintain their bias towards higher rates and signal that they are prepared to raise rates further if the data starts to show that inflation is not slowing as much as expected, or if the labor market holds up. “It’s too tight,” said Gus Faucher, chief economist at PNC Financial Services Group.
One of the key points that market participants “communicate” is to focus on the “long-term” median price. In Wednesday’s case, this is the outlook for 2026 and beyond. At the June meeting, the median outlook was 2.5%.
Joseph Brusuelas, chief economist at RSM, said an increase in inflation by even a quarter of a percentage point would be an “implicit sign” that the Fed would be happy to allow inflation to rise above its 2% target. He said it could be a signal and could confuse the market.
“We are laying the groundwork to prepare our customers for what we believe is our inflation target.” [will] “It’s going to go up,” he said.
Every quarter, the Federal Reserve updates its summary of economic forecasts, including its outlook for interest rates, inflation, GDP, and unemployment. Think of the SEP as a central bank laying down the footprints that form the basis of policy. Unfortunately, this trail often leaves something undesirable.
Especially in the past few years, Fed officials have misread inflation and growth, resulting in wildly wrong forecasts, dramatic policy adjustments, and unbalanced markets.
Reiterating this week, markets primarily expect the Fed to significantly upgrade its GDP growth forecast for this year in June, and also lower its forecasts for inflation and unemployment.
“The Fed will have to almost double its growth forecast,” Ellen Zentner, Morgan Stanley’s chief U.S. economist, told CNBC’s “Worldwide Exchange” on Tuesday.
The SEP and dot plot will get the most attention, but potential tweaks in the post-meeting statement could also be a focus.
Zentner suggested the Fed could change some of its policy characterizations and views on the economy.One potential adjustment from July statement “In determining the degree of additional policy tightening considered appropriate to return inflation to 2% over time, the Committee shall consider the cumulative tightening of monetary policy, the impact monetary policy has on economic activity. Inflation, economic and financial developments that could result in a statement that would take into account the lag. ”
He said removing the word “additional” would at least send a signal to Federal Open Market Committee members that they don’t think further rate hikes are necessary.
A second potentially significant change would be for the Fed to remove the word “very” from the sentence “The Committee remains very concerned about inflation risks.” This could indicate that the Fed is becoming less concerned about inflation.
“These are small little adjustments that shouldn’t be taken lightly and will be baby steps towards stopping the hiking cycle,” Zentner said.
After presenting the statement, dotplot and SEP, Powell takes to the stage to take questions from reporters, an event that typically lasts about 45 minutes.
Mr. Powell is using this meeting to build on what the FOMC has already done. He may also interpret things somewhat differently from what comes out of official documents, making events unpredictable and potentially moving the market.
The market expects the Fed to end this rate hike cycle, setting the chance of a November rate hike at just 30%. If the chairman takes action to disrupt these sentiments in the market, it will be significant.
But Zentner expects the central bank to be in line with the market’s thinking.
“We believe the Fed is done here,” he said. “They just don’t know it yet.”