It’s not what the Federal Reserve does, but what it says it could do in the future that will be most crucial when the central bank ends its two-day meeting Wednesday.
The Fed is expected to fire off another three-quarter point rate hike — its third in a row. It will also release quarterly forecasts for inflation, the economy, and the future path of interest rates Wednesday at 2 p.m. ET.
The Fed’s projections are always important, but this time they are even more so because investors have been trying to game how high it will raise interest rates and how much officials expect their actions could affect the economy.
Fed Chair Jerome Powell speaks at 2:30 p.m. ET, and he is expected to emphasize the central bank will do what it takes to fight inflation and it is unlikely to reverse its rate hikes anytime soon.
“I think he puts up a bulletin board behind him that says ‘Inflation Has to Come Down,’” said Rick Rieder, BlackRock chief investment officer for global fixed income. “I think he’s going to talk tough.”
The new forecasts also come as the central bank moves into a rate hiking zone that some economists expect will be more restrictive and could more seriously impact the economy.
“It’s not what they do, it’s what they say. This is our first actual tightening road map. We had theoretical road maps up until now, but from the Fed’s point of view, they’re crossing into a world of tightening. That’s an important thing,” said Diane Swonk, chief economist at KPMG.
The Fed has been lifting rates for seven months now, and will now be moving its target rate above what had been considered the neutral zone when inflation was low. Neutral is considered to be the interest rate level where Fed policy is no longer easy but not yet restrictive. The Fed has considered 2.5% to be neutral, and if it raises by three-quarters of a point, the fed funds rate will be in a range of 3% to 3.25%.
“This is really moving into restrictive monetary policy territory. We will be moving into no man’s land,” Swonk said. “We actually haven’t tightened policy to fight inflation since the early 1980s. Their goal is for a prolonged slowdown that grinds inflation slowly down and only gradually increases the unemployment rate. Whether they get there is another issue.”
Rate expectations jumped
Economists have been ratcheting up their forecasts for how high they expect the Fed to take the fed funds target before stopping the hikes. That level is called the terminal rate.
Expectations for Fed tightening increased dramatically in the past week, after a surprisingly hot August consumer price index report. Fed funds futures on Monday were pricing in a terminal rate of 4.5% by April, up from just around 4% before the inflation report was released last Tuesday.
The CPI rose 0.1% in August, while economists had expected a decline.