Construction workers outside the Marriner S. Eccles Federal Reserve Building, pictured Wednesday, July 27, 2022 in Washington, DC.
Kent Nishimura | Los Angeles Times | beautiful pictures
There’s not much mystery surrounding Wednesday’s Federal Reserve meeting, with markets expecting the central bank to approve a third consecutive three-quarter point rate hike.
However, that doesn’t mean there aren’t any significant conspiracies.
While The Fed will almost certainly provide what the market has ordered, it has plenty of other items on the frame that will grab Wall Street’s attention.
Here’s a quick summary of what to expect from the rate-setting Federal Open Market Committee meeting:
Price: In its continued quest to tackle runaway inflation, the Fed will almost certainly pass a 0.75 percentage point hike that will bring the benchmark interest rate up to its target range of 3%-3.25%. That’s the highest level at which lending rates have been since early 2008. The market is pricing in a slight chance of a full 1 percentage point increase, something the Fed has never done since it began using rates for lending. borrowing as the main policy tool in 1990.
Economic outlook: Part of this week’s meeting will see Fed officials give a quarterly update on interest rates and their economic outlook. While the Summary of Economic Forecasts is not an official forecast, it does provide insight into where policymakers see different indicators and interest rates heading. The SEP includes estimates of GDP, unemployment, and inflation as measured by the personal consumption expenditures price index.
“Dot chart” and “final scale”: Investors will be keeping a close eye on the so-called dot chart for each member’s rate projections for the remainder of 2022 and beyond, with this version of the meeting for the first time. This will last until 2025. Included in that will be a forecast for the “terminal rate,” or the point at which officials think they can stop raising interest rates, which could be the most emotional event for the market. of meeting. In June, the committee put the closing rate at 3.8%; it is likely to be at least half a percentage point higher after this week’s meeting.
Powell’s propeller: Chairman of the Fed Jerome Powell will hold his usual press conference after the end of the two-day meeting. In his most notable speech since the last meeting in July, Powell send a short, crisp address at the Fed’s annual Jackson Hole symposium in late August, highlighting his commitment to reducing inflation and in particular his willingness to inflict “some pain” on the economy to make it happen. realistic.
New kids on the block: A small take on this meeting was the participation of three relatively new members: Governor Michael S. Barr and area presidents Lorie Logan of Dallas and Susan Collins of Boston.
Collins and Barr have attended the meeting before in July, but this will be the SEP and their first dot plot. While individual names aren’t tied to the projections, it will be interesting to see if new members join in on Fed policy.
Take it all together and what investors will be watching most closely will be the tone of the meeting – specifically where the Fed is willing to go to tackle inflation and whether they are concerned about do too much and send the economy into a stronger recession or not.
Nicknamed by recent market action and comments, expecting a hawkish hard line.
“Fighting inflation is the first thing,” said Eric Winograd, senior economist at AllianceBerntein. “The consequences of not fighting inflation are greater than the consequences of fighting it. If that means a recession, that’s what it means.”
Winograd expects Powell and the Fed to stick to the Jackson Hole scenario that financial and economic stability is entirely dependent on price stability.
In recent days, the market has started to give up believe that the Fed will only increase this year could then start cutting back in early or mid-2023.
“If inflation is really stubborn and continues to be high, they will probably have to grind their teeth and endure the recession for a while,” said Bill English, a professor at the Yale School of Management and former economist. Fed seniors said. “It’s a very difficult time being a central banker right now, and they’re going to give it their all. But it’s tough.”
The Fed has accomplished several goals towards tightening financial conditions, with stocks retreating, housing market slump 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 a decline in valuations of stock market holdings, according to Fed data previously released in September.
However, The labor market remains strong and workers’ wages continue to rise, creating worries about a wage price spiral, even as gasoline costs fall. In recent days, both Morgan Stanley and Goldman Sachs have acknowledged that the Fed may have to raise rates in 2023 to bring prices down.
“The kind of door that the Fed is trying to get through, where they slow things down enough to bring down inflation but not to the point where they watch out for a recession is a very narrow door and I think it got narrower,” English said. There is a corresponding scenario in which inflation remains high and the Fed has to keep increasing, which he says is “a very bad alternative.”