On Wednesday, the Federal Reserve raises interest rates. That much is certain.
In addition, there are weighty questions about whether the central bank’s efforts to curb inflation can succeed without crashing the economy.
As Fed Chair Jerome Powell speaks of “pain” to the economy in his August Jackson Hole speech, investors are bracing for an aggressive message.
fell sharply Tuesday ahead of the Fed’s decision and the yield on the 10-year Treasury Note TMUBMUSD10Y,
rose to 3.57%.
Read: Can the Fed tame inflation without further crushing the stock market?
The Fed’s decision will come at 2 p.m. on Easter Wednesday.
How hawkish can the Fed get? Here are some signposts Fed watchers pay close attention to.
How big is an interest rate hike on Wednesday?
Michael Gregory, deputy chief economist at BMO Capital Markets, thinks the Fed will raise Federal Funds interest rates by 75 basis points to a range of 3% to 3.25%. The excessive rise in core consumer price inflation in August sealed the deal for a 75 basis point move and raised the likelihood of a 100 basis point move, he said.
Futures markets from the Fed and some analysts have predicted the possibility of a 100 basis point gain, but Gregory resisted.
“One problem with an unprecedented 100 basis point move is that it can create a sense of policy panic. An equally unprecedented 75bp move three-turf gives a better sense of ‘we’ve got this,'” Gregory wrote in a note to customers.
But some economists, such as Japanese investment bank Nomura, are sticking to forecasts of a 100 basis point move.
To see: What investors fear from a Fed rate hike of a full percentage point?
What Powell Says About November
Before the surprise surge in core consumer inflation in August, economists thought the Fed would switch back to a smaller quarter of a percentage point rate hike in November.
Now Powell could leave the door open for a 75bp fourth move in November 1-2.
“Powell will be aggressive again at the press conference; any mild impression will likely be the result of miscommunication,” said Roberto Perli, head of global policy at Piper Sandler.
Fed Governor Michelle Bowman said last month that “comparable increases” should be on the table until the Fed sees inflation fall in a consistent, meaningful and sustainable way.
“If FOMC participants in general have this view, and Powell specifically this view, and they equate ‘of equal magnitude’ with 75 bp rate hikes, then this shouldn’t be the last 75 bp rate hike,” said Tim Duy. , US chief economist at SGH Macro Advisers.
The Fed’s Reference Rate Dot-Plot Chart
Economists think the Fed will use the dot plot to signal a “higher and longer” interest rate.
Krishna Guha, vice chairman of Evercore ISI, believes the Fed will raise the median benchmark rate target to a range of 4% – 4.25% by the end of the year. That’s an increase of 3.25% -3.5% from the earlier forecast in June.
Guha believes the “terminal” rate – or the peak for rate hikes this cycle – will be revised to a range of 4.25%-4.5% from its previous estimate of 3.75%-4%.
At the same time, the dot plot will also show that the Fed has no intention of cutting interest rates next year.
“What the Fed is trying to do is work its way into where they can curb the economy without actually triggering an outright recession,” said Seth Carpenter, chief global economist at Morgan Stanley.
Once they reach a level they believe will begin to dampen demand, but not so much that things will collapse, Fed officials plan “to hang out there while the economy slows,” he added in an interview. on Bloomberg Radio.
How much ‘pain’ will the new economic projections emphasize?
Priya Misra, head of global interest rate strategy at TD Securities, expects the Fed to resort to less optimistic outlooks for output and labor market conditions to provide “proof” that the Fed is willing to accept some pain in economic conditions to reduce the downward pressure skyrocketing inflation.
In their latest forecast, the Fed predicted that the unemployment rate would only rise to 4.1% by 2024. The economy would continue to grow at just under 2% yoy over the three-year forecast.
Also read: The Fed Is Ready To Tell Us How Much ‘Pain’ The Economy Will Suffer
The Fed will also push up their inflation expectations.
“We don’t expect policymakers to forecast a return to core PCE inflation to the target of 2% over the forecast horizon,” although the Fed’s forecasts will include 2025, Misra said.
Checking out: The stock market has risen on the day of every Fed rate hike decision in 2022. Could it happen again on Wednesday?