All eyes are on the Federal Reserve as the central bank kicks off a two-day policy meeting Tuesday, as officials are widely expected to raise short-term interest rates by three-quarters of a percentage point at the conclusion of their meeting Wednesday.
In the face of stubborn inflation, officials are expected to raise the central bank’s benchmark interest rate — the federal funds rate — to a new range of 3.0% to 3.25% from a current range of 2.25 to 2.50%. This would mark the third-straight 75-basis-point rate hike since June, bringing rates to their highest level since 2008.
The Fed is likely to signal that it will raise interest rates more aggressively and expect rates to be higher for longer when it releases a summary of each official’s interest rate expectations known as the “dot plot.”
“With inflation rampant, Powell will try hard to not change the perception of a hawkish Fed and will emphasize the FOMC’s determination to act to bring inflation down to more acceptable levels,” Roberto Perli, head of global policy for Piper Sandler macro research, wrote in a note to clients. “He will also probably continue to talk about ‘pain’ being required to achieve that objective, which is a polite way of saying that the Fed is willing to tolerate a recession in order to achieve its inflation objective.”
Markets expect the benchmark interest rate to rise above 4% by year end, according to CME Group. However, how high and how quickly interest rates go from there and how long they remain at high levels remain open questions.
“They’ve acknowledged for a while this will be a bumpy ride as they continue to bring inflation down,” Vanguard Group Senior International Economist Andrew Patterson told Yahoo Finance Live. “But [Wednesday] we’d expect them to really emphasize not necessarily the terminal rate — they’re not going to give you much clarity on that, they may hint at it — but really how long they’re going to keep rates at that terminal rate.”
Federal Reserve Chair Jerome Powell has emphasized keeping rates high to fight inflation, noting that the Fed doesn’t want to risk Americans’ expectations of inflation to keep rising and that history cautions against prematurely loosening policy. Meanwhile, Fed Vice Chair Lael Brainard has said monetary policy will need to be restrictive for some time and that the Fed is in it for as long as it takes to get inflation down.
Perli expects the Fed’s interest rate projections to be “significantly” higher than in June — when officials projected the Fed funds rate would end the year around 3.4% and 3.8% in 2023 — and also predicts the Fed will bring the funds rate up to between 4% and 4.25% by year end.
The Fed will also release a summary of its quarterly economic projections, which will include Fed officials’ outlook for inflation, unemployment, and the overall economy. Given expectations for higher interest rates, many economists expect officials to lower their forecasts for GDP growth this year, while raising their estimates for unemployment and inflation.
“We do see a risk of recession, especially if the Fed continues to get aggressive,” Luke Tilley, chief economist for Wilmington Trust, wrote in a note to clients. “They could overdo it and overcorrect. And that poses a risk to the outlook and could send us into recession.”
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