Key Points
Most people think that the Federal Reserve will raise the benchmark interest rate by 0.75 percentage points on Wednesday.
The markets will pay close attention to Chairman Jerome Powell’s press conference after the meeting, as well as the quarterly reports on the economy and interest rates.
Based on recent market activity and talk, hawks are expected to take an aggressive stance.
It’s not a big secret that the Federal Reserve will meet on Wednesday, and the markets expect the central bank to approve its third straight three-quarter-point increase in interest rates.
But that doesn’t mean that there isn’t much interest.
Even though the Fed will almost certainly do what the market wants, it has other things planned that will get Wall Street’s attention.
Here is a summary of what to expect at the meeting of the Federal Open Market Committee, which sets interest rates:
Rates: The Fed is still trying to stop inflation from getting out of hand, so it is likely to approve a 0.75 percentage point increase. This will bring the benchmark rate to a target range of 3%-3.25%. The Fed Funds rate hasn’t been this high since the beginning of 2008. Since the Fed started using the fed funds rate as its main policy tool in 1990, the markets are pricing in a small chance that the central bank will raise the rate by 1 percentage point, which it has never done before.
As part of the meeting this week, Fed officials will give a quarterly update on their predictions for interest rates and the economy. Even though the Summary of Economic Projections is not an official forecast, it does show where policymakers think different measures and interest rates will go. In the SEP, the GDP, unemployment, and inflation numbers are all based on the personal consumption expenditures price index.
Ed Yardeni wants the Federal Reserve to just raise interest rates and be done with it.
The “point plot” and the “terminal rate”: Investors will look at the so-called “dot plot” of each member’s rate estimates for the rest of 2022 and future years. For the first time, this meeting’s version goes as far as 2025. This will include a prediction of the “terminal rate,” or the point at which officials think they can stop raising rates. This could be the most important thing that happens at the meeting for the market. In June, the committee thought the final rate would be 3.8%. After this week’s meeting, they expect it to be at least 0.5 percentage points higher.
At the end of the two-day meeting, Fed Chair Jerome Powell will hold a press conference, as he does every time. At the Fed’s annual symposium in Jackson Hole, Wyoming, in late August, Powell said the most interesting things he had said since the last meeting in July. He said he was committed to lowering inflation and was ready to make the economy feel “some pain” to do so.
Newcomers: The fact that Governor Michael S. Barr, Regional Presidents Lorie Logan of Dallas and Susan Collins of Boston, and two other relatively new members are taking part in this conference makes it a little more complicated. Collins and Barr were at the conference in July, but this is the first SEP and dot plot they have made. Predictions aren’t based on specific names, but it will be interesting to see if the new members agree with the Fed’s policy.
The bigger picture
All things considered, investors will be most interested in the tone of the meeting, especially how far the Fed is willing to go to fight inflation and if it is afraid of doing too much and causing a worse recession.
Based on recent market activity and talk, hawks are expected to take an aggressive stance.
A senior economist at Alliance Bernstein named Eric Winograd said, “Our main goal is to fight inflation.” It costs more to do nothing about inflation than it does to fight it. If it sounds like a recession, it must be one.
Winograd thinks that Powell and the Fed will stick to the Jackson Hole Script, which says that financial and economic stability are completely tied to price stability.
In recent days, the markets have started to give up on the idea that the Fed would only raise rates until the end of this year and then start lowering them, maybe as early as the middle of 2023.
Bill English, a professor at the Yale School of Management and former senior Fed economist, said, “If inflation is really stubborn and stays high, they may have to grit their teeth and go through a long recession.” “Central bankers are having a hard time right now, but they will do their best. But it is hard.”
The Fed has reached some of its goals for tightening the economy’s finances. Stocks have gone down, the housing market is on the edge of a recession, and Treasury rates have gone up to levels not seen since before the 2008 financial crisis. The Fed said at the beginning of September that the net worth of households fell by more than 4% in the second quarter, to $143.8 trillion. Most of this was because the value of assets on the stock market went down.
Even though fuel prices have gone down a lot, the job market has stayed strong and worker pay has kept going up. This has raised concerns about a wage-price spiral. In the past few days, Morgan Stanley and Goldman Sachs have both said that the Fed might have to raise interest rates until 2023 to bring prices down.
