Construction workers in front of the Marriner S. Eccles Federal Reserve Building photographed on Wednesday July 27, 2022 in Washington, DC.
Kent Nishimura | Los Angeles Times | Getty Images
Wednesday’s Federal Reserve meeting is not very mysterious as markets broadly expect the central bank to approve its third straight three-quarter-point rate hike.
That doesn’t mean there isn’t considerable intrigue, however.
While the Fed will almost certainly deliver what the market has ordered, it has many other things on its agenda that will draw Wall Street’s attention.
Here’s a quick rundown of what to expect from the Federal Open Market Committee meeting:
Prices: In its ongoing bid to fight runaway inflation, the Fed will almost certainly approve a 0.75 percentage point hike that will bring its interest rate to a target range of 3% to 3.25%. That’s the highest the Fed funds rate has been since early 2008. Markets are pricing in a slim chance of a full 1 percentage point hike, something the Fed hasn’t done since it began making the Fed funds rate its primary focus in 1990 to use a political tool.
Economic Outlook: As part of this week’s meeting, Fed officials will release a quarterly update on their interest rates and economic outlook. Although the economic forecast summary is not an official forecast, it does provide an insight into where policymakers are looking at various ratios and interest rates. The SEP contains estimates for GDP, unemployment and inflation as measured by the personal consumption price index.
The “dot plot” and the “final rate”: Investors will most closely monitor what is known as the dot plot of each member’s rate forecasts for the remainder of 2022 and beyond, with this session’s version extending to 2025 for the first time. Included in this is the forecast for the “final rate,” or the point at which officials believe they can halt rate hikes, which could be the most market-moving event of the meeting. In June, the committee set the final interest rate at 3.8%; after this week’s meeting, it should be at least half a percentage point higher.
Powell Presser: Fed Chair Jerome Powell will hold his usual press briefing after the conclusion of the two-day meeting. In his most notable remarks since the last meeting in July, Powell delivered a short, scathing speech at the Fed’s annual symposium in Jackson Hole, Wyoming, in late August, emphasizing his commitment to bringing inflation down and specifically his willingness to “do something.” to inflict pain.” on the economy to achieve this.
New kids on the block: A minor blemish at this gathering is the contribution 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 previous meeting in July, but this will be their first SEP and Dot Plot. While individual names aren’t tied to forecasts, it will be interesting to see if the new members agree with the direction of Fed policy.
The big picture
All in all, investors will be most closely watching the tone of the session — specifically, how far the Fed is willing to go in fighting inflation and whether it’s worried about overdoing it and pushing the economy into a deeper recession .
A hawkish hard line is to be expected judging by recent market action and commentary.
“Fighting inflation is task one,” said Eric Winograd, Senior Economist at AllianceBernstein. “The consequences of not fighting inflation are greater than the consequences of fighting it. If that means recession, then that’s it.”
Winograd expects Powell and the Fed to stick to the Jackson Hole script that financial and economic stability depends entirely on price stability.
Over the past few days, markets have begun to give up belief that the Fed will not hike until this year and then potentially start cutting in early or mid-2023.
“If inflation is really persistent and stays high, they might just have to grit their teeth and see a recession that lasts a while,” said Bill English, a professor at the Yale School of Management and a former chief economist at the Fed. “It is a very tough time to be central bankers right now and they will do their best. But it is difficult.”
The Fed has achieved some of its goals for tightening financial conditions, with equities falling, the housing market plummeting to the point of recession and Treasury yields soaring to highs not seen since the beginning of the financial crisis were reached. Household net worth fell more than 4% to $143.8 trillion in the second quarter, mostly due to a decline in the valuation of stock market holdings, according to data released by the Fed in early September.
However, the job market has remained strong and workers’ wages continue to rise, raising concerns of a wage-price spiral even as petrol costs at the pump are on the decline. In recent days, both Morgan Stanley and Goldman Sachs conceded that the Fed may need to hike rates until 2023 to bring prices down.
“The kind of door that the Fed is trying to go through, where they’re slowing things down enough to bring down inflation but not so much that they cause a recession, is a very narrow door, and I think it is narrowed,” said English. There is a related scenario where inflation remains stubbornly high and the Fed needs to hike further, which he says is “a very bad alternative going forward”.