Fed to unveil new projections with investors on alert
U.S. Federal Reserve officials to reveal when and how often they think the economy will need an interest rate hike over the next three years when they release new forecasts at their policy meeting Wednesday, with investors on alert for a faster pace of tightening.
The dot plot, published quarterly, presents policy makers’ projections, on an anonymous basis, for economic growth, employment and inflation, as well as the timing of interest rate hikes.
This will show whether most stick to the recently voiced views that the Delta variant of the coronavirus, which has hurt economic activity, will have a short-lived effect on the recovery despite the current turmoil and uncertainty it faces. provokes. This week’s set of points will also include policymakers’ forecasts for 2024 for the first time.
Interest rates have been close to zero since the start of the COVID-19 pandemic, with the Fed pledging not to increase borrowing costs until the economy fully heals. According to the Fed’s new framework, this means more emphasis needs to be placed on achieving maximum jobs as well as its average inflation target of 2 percent cnet.
Higher-than-expected inflation despite some recent moderation is testing the commitment of policymakers to this new framework and could push the median of the Fed’s forecast for an interest rate take-off to 2022 from 2023 at the June meeting.
For this to happen, only three policymakers would need to advance their projections, and a lag of just two would result in a split within the Fed over whether take-off is in the cards for next year or more. late.
“We all know that dots are not promises or commitments, but it’s always the best that the market should follow in determining what the policy will be going forward,” said Roberto Perli, economist at Cornerstone Macro and former member of the Fed. “The risks are on the upside.” There are growing expectations that the central bank will at least use its next meeting on September 21-22 to signal its intention to start scaling back its massive bond purchases, also put in place in early 2020 to support the recovery. economy, in November if incoming data holds up, amid the fastest economic recovery in history after a brief recession last year.
Fed officials argue that the asset purchase program has served its purpose as demand, which it most directly affects, rebounded even as the supply of labor and goods declined. been limited.
The cut could be completed as early as mid-2022, paving the way for the Fed to raise interest rates near zero at any time thereafter.
The consensus among economists polled by Reuters is that rates will stay close to zero until 2023, but more than a quarter of those polled in the September survey predict that the Fed will hike rates next year.
If the Fed’s median interest rate projections for 2022 and 2023 remain the same, attention will be focused on 2024 as investors analyze the pace of the rate hike once the take-off begins. It will also show how many policymakers, if any, still see interest rates suspended until at least 2024. In June, five of 18 policymakers saw rates remain stable until the end of 2023.
Currently, federal funds rate futures, which track short-term interest rate expectations, predict a rate hike in 2023 and one or two more hikes in 2024, but the Primary Dealer’s latest investigation, that the Fed consults for a reading on market expectations before each meeting, reveals three additional rate hikes.
If the Fed plans three or more hikes at this week’s meeting for 2024, “that would give a hawkish signal that could more than offset any conciliatory message about the cut,” said Michael Pierce, an economist at Capital Economics.
The extent to which policymakers change their other economic forecasts could also provide valuable information. Few people expect the Fed to change its expectations for the level at which interest rates could rise, currently estimated at 2.5%, but their forecast for US economic growth this year and inflation projections this year and next year could be revised.
Economists have downgraded their gross domestic product estimates for the current quarter, citing weak motor vehicle sales as inventory shortages persist and a recent spate of COVID-19 infections fueled by the variant. Coronavirus Delta, although data released last Thursday showed retail sales in the United States. sales increased unexpectedly in August.
Inflation estimates could prove trickier. Fed Chairman Jerome Powell, still waiting to see if he will be reappointed for a second term by US President Joe Biden, has firmly maintained the view that higher than expected inflation is transitory, although he and others have admitted it may linger longer than this year amid persistent supply constraints.
Last week, Labor Department data showed underlying consumer prices rose at their slowest pace in six months in August, suggesting inflation was likely to have peaked.
Some other Fed officials are more alarmed, and several have raised the possibility that higher inflation will persist and cause inflation expectations to rise as a reason to quickly cut asset purchases to allow time for rate hikes. faster if necessary.
If the median projections show, for example, an additional rate hike in 2023 over current forecasts and point to an earlier take-off date, Powell’s likely reiteration in his post-meeting press conference that the cut doesn’t is not related to rate hike decisions, could fall flat.
“The board has drifted in a hawkish direction,” said Tim Duy, economist at SGH Macro Advisors and professor of economics at the University of Oregon, who expects the dots to show that the Most policymakers now believe that a rate hike in 2022 will be appropriate, given rising concerns about inflationary pressures. “Doves are now limited.”