Federal Reserve Board Chairman Jerome Powell speaks during a news conference after the Federal Open Market Committee meeting at the Federal Reserve in Washington, DC on July 26, 2023.
Saul Loeb AFP | getty images
As is often the case, this week’s Federal Reserve meeting will be less about what policymakers are doing now than what they expect to do in the future.
At the moment, there is almost no chance that the US central bank will choose to raise its benchmark lending rate. Markets are pricing in just a 1% chance of a 12th hike since March 2022, according to CME Group data.
But this week’s meeting, which ends on Wednesday, will be expected to focus on key indicators – interest rates, gross domestic product, inflation and unemployment – in the Fed’s quarterly update.
This is where the suspense lies.
Here’s a look at what to expect.
Rate of interest
The Fed won’t tinker with its key funds rate, which determines how much banks charge each other to make overnight loans, but it also spreads across many forms of consumer lending.
Historically, and especially during Chairman Jerome Powell’s reign, the Fed doesn’t like market downturns, especially when anticipation is trending so strongly in one direction. The funds rate is locked in to remain in its current target range of 5.25%-5.5%, its highest level since the early part of the 21st century.
However, there is widespread belief that the Fed will make sure the market knows that it should not make assumptions about what will happen next.
“There’s likely to be a pause here, but there’s a clear possibility that the November meeting is, as they say, a live meeting. I don’t think they’re ready to say, ‘We’re done now,’ ” Roger Ferguson, a former vice chairman of the Fed, said in an interview this week on CNBC’s “Squawk Box.”
“It is time for the Fed to proceed very cautiously,” he said. “By no means should they say that we are completely done, because I don’t think they really know that yet, and I think they would be willing to do another job if needed. Want flexibility.”
One way for the central bank to communicate its intentions is through its dot plot, a grid that anonymously plots individual members’ expectations for future rates.
The market will be on the lookout for subtle changes in points to understand where the authorities are taking things.
“I think they will maintain that bias toward higher rates and signal that they are willing to raise the funds rate further if the data starts to show that either inflation is not slowing as much as they expect.” , or if the labor market remains very tight,” said Gus Faucher, chief economist at PNC Financial Services Group.
One key “tell” market participants will be focusing on: the “long-run” midpoint, which in Wednesday’s case would be a projection beyond 2026. At the June meeting, the average outlook was 2.5%.
Should there be a change of more than a quarter percentage point, it could be a “muted” signal that the Fed is willing to let inflation run above its 2% target and potentially send a stir into markets, said Joseph Brusuelas, chief economist at RSM. Will be satisfied.
“We are laying the groundwork to prepare our clients for what we think is inflation targeting [will] Going up,” he said.
Each quarter the Fed updates its summary of economic projections, or outlook for rates, inflation, gross domestic product and unemployment. Think of the SEP as the central bank laying down a trail of policy breadcrumbs – a trail, unfortunately, that often leaves something to be desired.
Particularly over the past several years, projections have been particularly inaccurate as Fed officials have misread inflation and growth, leading to some dramatic policy adjustments that have kept the market off balance.
In this week’s recap, the market broadly expects the Fed to show a sharp increase in its June forecast for GDP growth this year, as well as cut its outlook for inflation and unemployment.
“The Fed will have to nearly double its growth forecasts,” Morgan Stanley’s chief U.S. economist Ellen Zentner said on CNBC’s “Worldwide Exchange” on Tuesday.
While the SEP and dot plots will attract the most attention, potential changes in the post-meeting statement may also be a focal point.
Zentner suggested that the Fed could change some features of its policy as well as its outlook on the economy. One possible adjustment from the July statement could be this sentence, “In determining the range of additional policy measures appropriate to bring inflation back to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the gap between the two, and the extent to which inflation is expected to remain within 2 percent of inflation.” ” “By which monetary policy affects economic activity, inflation and economic and financial development.”
Removing the word “additional” would signal that Federal Open Market Committee members are at least considering that no further rate increases will be needed, he said.
Another potentially powerful change would be that in the sentence, “The Committee remains extremely attentive to inflation risks,” the Fed should remove the word “extremely.” This may indicate that the Fed is becoming less concerned about inflation.
“These are small changes that shouldn’t be taken lightly, and they will be small steps toward stopping the hiking cycle,” Zentner said.
After the statement, dot plot and SEP are released, Powell will take the stage to take questions from reporters, an event that typically lasts about 45 minutes.
Powell uses the conference to build on what the FOMC has already done. He also sometimes puts a different spin on what appears from official documents, making events unpredictable and potentially market-shattering.
Markets are betting that the Fed will end this rate-hike cycle, giving only a 30% chance for a hike in November. If the chairman does anything to disabuse the market of that sentiment, it would be worthwhile.
However, Zentner expects the central bank to act in line with market sentiments.
“We believe the Fed’s work is done here,” he said. “They don’t know it yet.”