The Federal Reserve is raising rates on Wednesday. That much is certain.
Beyond that, there are big questions about whether the central bank’s efforts to reduce inflation will succeed without crashing the economy.
With Fed Chairman Jerome Powell talking about “pain” for the economy in his Jackson Hole speech in August, investors are looking forward to a hawkish message.
There was a sharp decline on Tuesday ahead of the Fed’s decision and the yield on the 10-year Treasury note TMUBMUSD10Y,
jump to 3.57%.
Read: Can the Fed moderate inflation without further depressing the stock market?
The Fed’s decision will come at 2 pm Eastern on Wednesday.
How hawkish can the fed get? Here are some signs that nutrition watchers are paying close attention to.
How much of a rate hike on Wednesday?
Michael Gregory, deputy chief economist at BMO Capital Markets, thinks the Fed will raise the federal funds rate by 75 basis points to a range of 3% to 3.25%. The huge gain in core consumer price inflation in August sealed the deal for a 75bp move and increased the odds of a 100bp move, he said.
Fed futures markets and some analysts speculated on the possibility of a 100 basis point hike, but Gregory argued against it.
“An issue with an unprecedented 100bp move is that it could signal a sense of policy panic. An unprecedented 75bp three-peat move gives a better sense of “we got this,” Gregory wrote in a note to clients.
But some economists, like Japanese investment bank Nomura, are sticking with forecasts of a 100 basis point move.
Look: What stock market investors fear from a full percentage point Fed rate hike
What Powell says about November
Before the surprise gain in core consumer inflation in August, economists thought the Fed would change the rate in November to a smaller rate hike of a quarter of a percentage point.
Now Powell may leave the door open for a fourth 75bp move in November 1-2.
“Powell will be a hawk again at the press conference; any dovish impression is likely the result of miscommunication,” said Roberto Perli, head of global policy at Piper Sandler.
Fed Gov. said. Michelle Bowman last month that “similar increases” should be on the table until the Fed sees inflation falling in a consistent, meaningful and lasting way.
“If FOMC participants in general have this view, and Powell specifically has this view, and they equate to 75bp rate hikes, this should not be the last 75bp rate hike,” Tim said Duy, chief US economist at SGH Macro Advisors.
The ‘dot-plot’ chart for the Fed’s benchmark rate
Economists think the Fed will use the dot plot to signal a “higher longer” path for interest rates.
Krishna Guha, vice chairman of Evercore ISI, thinks the Fed will raise the median target for the benchmark rate to a range of 4% – 4.25% by the end of the year. That’s an increase from the 3.25%-3.5% range on the June forecast.
Guha thinks the “terminal” rate – or the high point for rate hikes this cycle – will be revised up to a range of 4.25%-4.5% from the previous estimate of 3.75%-4%.
At the same time, the dot plot will also show that the Fed has no intention of cutting rates in the next year.
“What the Fed is trying to do is feel their way to where they can rein in the economy without causing an outright recession,” said Seth Carpenter, chief global economist at Morgan Stanley.
Once they reach a level that they think is starting to ease demand, but not so much that things crash, Fed officials plan to “hang out there as the economy slows, ” he said, in an interview on Bloomberg Radio.
How much ‘pain’ will the new economic projections highlight?
Priya Misra, head of global rates strategy at TD Securities, expects the Fed to resort to a less optimistic view of output and labor market conditions to provide “proof” that the Fed is willing to take some pain in conditions economic in order to reduce. Sky-high inflation.
In its last forecast, the Fed projected that the unemployment rate would only inch up to 4.1% by 2024. The economy would continue to grow at an annual rate of just under 2% over the three-year forecast.
Also read: The Fed is ready to tell us how much ‘pain’ the economy will have
The Fed will also raise their inflation expectations.
“Policymakers are not expected to pencil in a return to core CPI inflation to the 2% target over the forecast horizon,” although the Fed’s forecasts will include 2025, Misra said.
Check out: The stock market rallied on the day of every Fed rate hike decision in 2022. Could it happen again on Wednesday?