Aggressive Fed Meeting Ahead Looming

Aggressive Fed Meeting Ahead Looming

Fed to Hike and Hammer Home Hawkish Message: Decision-Day Guide

  • FOMC ‘dot plot’ forecasts will be a main focus of investors
  • Powell to stress resolve to curb inflation near a 40-year high

FOMC to debate 75 or 100 basis-point hike at its meeting

While investors are pricing rates peaking near 4.5% next March, Fed officials have been vague about their terminal rate plans.

“Markets are going to be focused mostly on the dots,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “We are getting a pulling back of the curtain of what the Fed is thinking longer term.”

Rates

 

Fed leaders will probably debate the possibility of a 100 basis-point hike at the meeting after core consumer prices rose by more than expected in August. Markets are putting odds of such a hike at nearly 20%, with one Wall Street forecaster, Robert Dent of Nomura Securities, even calling it a likely outcome.

At the last meeting in July, Powell left the door open to such a move when he said “we wouldn’t hesitate to make an even larger move than we did today if the committee were to conclude” that was appropriate.

What Bloomberg Economics Says

“Powell will emphasize the committee’s determination to hold rates higher for longer. He will be more forthcoming in acknowledging the likely pain involved in bringing down inflation. He may opt not to say that the committee plans to downshift the pace of rate hikes — although that will inevitably happen at some point — instead sending a message that every option is on the table for the November FOMC.”

— Anna Wong, Andrew Husby and Eliza Winger (economists)

— To read more click here

 

“I think it’s a close call,” said Roberto Perli, head of global policy research at Piper Sandler & Co. “A good discussion is in order here. They have been behind the curve systematically. They have to think getting in front of the curve would be good.”

FOMC May Project Slow Growth, Higher Unemployment

Below-trend growth is Fed’s goal to reduce price pressures

 

Source: Bloomberg survey of economists September 9-14

 

Note: Economists were asked to forecast what the median Federal Open Market Committee participant would estimate in the Summary of Economic Projections.

Summary of Economic Projections

 

The updated Summary of Economic Projections will include policy makers’ first forecasts for 2025. While most of the investor focus will be on the rate forecast for this year and next, projections may also show the FOMC expects to keep rates higher for longer, with rates coming down only to 3.6% in 2024 and 2.9% in 2025.

 

Powell has emphasized the Fed is trying to reduce growth to below its long-run trend to lower demand in line with Covid-constrained supplies. Reflecting this, the committee is likely to slash its growth estimates for 2022 and 2023 and could edge up its unemployment rate estimates for 2023 and 2024, according to economists surveyed by Bloomberg.

 

With inflation persisting more than expected, the Fed could project inflation returning to its 2% target only in 2025.

FOMC Statement May Repeat Ongoing Hikes Are Appropriate

One fifth of economists see statement looking for slowing pace of hikes

Source: Bloomberg News survey of economists Sept 9-14

FOMC Statement

 

The Fed is likely to reiterate that recent indicators of economic growth have softened while continuing to pledge “ongoing” increases in interest rates without specifying the size. Some economists say the statement could include that the pace of increases will slow at some point, reflecting Powell’s public comments in July and at the Fed’s Jackson Hole conference in August.

 

Following last week’s disappointing consumer price index, which showed core inflation, excluding food and energy, accelerating, the committee could also choose to voice more concern on inflation, said Derek Tang, an economist at LH Meyer in Washington.

 

“Watch for upgrades to the wording on inflation: for example, inflation is higher and moving further away from our objective,” he said.

Dissent

 

Most economists expect a unanimous decision this month, with the FOMC keeping a united front behind Powell’s fight against inflation. If there is a dissent, it’s most likely to come from St. Louis Fed President James Bullard, who has dissented as a hawk this year, or Kansas City Fed President Esther George, who has dissented in a dovish direction.

 

“There seems to be a range of views on the committee” on whether to step down to a 50 basis-point hike in November or keep going at 75 basis points, said Julia Coronado, president of MacroPolicy Perspectives LLC.

Balance Sheet

 

The Fed this month has stepped up its shrinking of its $8.8 trillion balance sheet to an annual pace of about $1.1 trillion. Some Fed officials have favored the sale of mortgage-backed securities as part of the effort to restore the balance sheet to a more normal level. No decision on this is expected this meeting.

Press Conference

 

Powell’s July press conference was widely interpreted on Wall Street as dovish as he said the central bank was moving away from explicit forward guidance on rates, and he expected the pace of hikes to slow at some point. Fed officials spent the following weeks clarifying their view that they weren’t stepping back from the inflation fight.

 

With that in mind, Powell could try to ensure his message is viewed as suitably hawkish and clear this meeting.

 

“What matters the most is what Powell will say,” Perli said. “The last few press communications there have been communication hiccups. The concern I hear is that Powell will say something that will lead the market to believe to something that is not accurate. People are worried about a repeat of that experience.”

https://www.bloomberg.com/news/articles/2022-09-21/fed-to-hike-and-hammer-home-hawkish-message-decision-day-guide