Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee, at the Federal Reserve in Washington, DC, 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 are doing today and more about what they plan to do in the future.
Right now, there is virtually no chance that the U.S. central bank will choose to raise its benchmark borrowing rate. Markets are pricing in just a 1% chance of what would be the 12th hike since March 2022, according to CME Group data.
But this week’s meeting, which ends Wednesday, will feature the Fed’s quarterly update on what it expects from a series of key indicators: interest rates, gross domestic product, inflation and unemployment.
This is where the suspense lies.
Here’s a look at what to expect.
The Fed won’t change its benchmark rate, which sets what banks charge each other for overnight loans but also trickles down to many forms of consumer debt.
Historically, and particularly during the era of Chairman Jerome Powell, the Fed does not like to upset markets, especially when expectations are moving so strongly in one direction. The funds rate provides a way to stay within its current target range of 5.25% to 5.5%, its highest level since the start of the 21st century.
There is, however, a widely held belief that the Fed will ensure that the market knows that it should not make assumptions about the future.
“There will probably be a break here, but it’s definitely possible that the November meeting will be, as they say, a live meeting. I don’t think they’re ready to say, ‘We’re done now’.” Roger Ferguson said. a former Fed vice chair, said this week on CNBC’s “Squawk Box.”
“This is the time for the Fed to act very cautiously,” he added. “Under no circumstances should they say we’re completely done, because I don’t think they really know yet, and I think they want to have the flexibility to do one more if necessary.”
The point plot
One way for the central bank to communicate its intentions is through its dot plot, a grid that anonymously presents each member’s expectations for future rates.
Markets will look for subtle changes in points to understand where those in charge see things heading.
“I think they will maintain this bias towards higher rates and indicate that they are willing to raise the funds rate further if the data starts to show that either inflation is not slowing as they expect or “too tight,” said Gus Faucher, chief economist at PNC Financial Services Group.
Market participants will focus on one key indicator: the “long-term” midpoint, which in Wednesday’s case will be the projection beyond 2026. At the June meeting, the median outlook was 2.5 %.
If this number were to rise by even a quarter of a percentage point, it could be a “tacit” signal that the Fed will be content to let inflation exceed its 2% target and possibly shake up markets. , said Joseph Brusuelas, chief economist at RSM.
“We are laying the groundwork to prepare our clients for inflation targets that we believe will rise,” he said.
Each quarter, the Fed updates its summary of economic projections, or its outlook for rates, inflation, GDP and unemployment. Think of the SEP as a central bank that draws a policy breadcrumb – a breadcrumb, unfortunately, that often leaves something to be desired.
In recent years in particular, projections have proven particularly flawed as Fed officials have misinterpreted inflation and growth, leading to drastic policy adjustments that have unbalanced markets.
In this week’s iteration, markets widely expect the Fed to post a sharp increase in its June forecast for GDP growth this year, as well as a reduction in its outlook for inflation and unemployment.
“The Fed is going to have to almost double its growth forecasts,” Ellen Zentner, chief U.S. economist at Morgan Stanley, said Tuesday on CNBC’s “Worldwide Exchange.”
Although the SEP and dot plot will attract the most attention, potential changes to the post-meeting statement could also be a focal point.
Zentner suggested the Fed could change some of its characterizations of its policy as well as its view of the economy. A potential adjustment to the July statement could be the sentence: “In determining the extent of additional policy tightening that might be appropriate to reduce inflation to 2 percent over time, the Committee will take into account the policy tightening cumulative monetary policy, the lags with which monetary policy affects economic activity and inflation, as well as economic and financial developments.
Removing the word “additional,” she said, would send a signal that members of the Federal Open Market Committee at least consider that no further rate hikes will be necessary.
A second potentially important change would be for the Fed to remove the word “strongly” from the sentence “The Committee remains keenly aware of inflation risks.” This could indicate that the Fed is becoming less concerned about inflation.
“These are tiny little adjustments that should not be taken lightly, and they would be small steps toward stopping the cycle of hiking,” Zentner said.
The press conference
After the statement, dot plot and SEP are released, Powell will take the podium 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. It also sometimes has a somewhat different twist than what appears in official documents, making events unpredictable and potentially market-influencing.
Markets are betting that the Fed has ended this cycle of rate hikes, assigning only a 30% chance of an increase in November. If the president did something to disabuse the market of this sentiment, it would make sense.
Zentner, however, expects the central bank to align with market thinking.
“We think the Fed is done with this,” she said. “They just don’t know it yet.”