Federal Reserve Chairman Jerome Powell holds a news conference after the Federal Reserve raises its target rate by three-quarters of a percentage point on September 21, 2022 in Washington.
Kevin Lamarck | Reuters
Call it a sign of an era when a 0.5 percent interest rate hike by the Federal Reserve will be seen as an easing of monetary policy.
Until this year, the Fed had never raised its benchmark borrowing rate by more than a quarter of a percentage point at a time in 22 years. In 2022, they’ve done it five times (four by three-quarter points and one by 0.5 percentage points), with Wednesday’s widely anticipated 0.5 percentage point move being the sixth.
Related investment news
The fight against inflation has completely overturned policy norms. Investors are now conditioned by aggressive central banks, so any withdrawal from the recent mega move is seen as a relative easing.
Wednesday’s meeting of the Federal Open Market Committee, which sets interest rates, will see a lot of action. It will be as much about current rate hikes as it is about what the Fed plans going forward and where it sees the economy head.
Let’s take a quick look at multiple variables that affect the results.
price
Especially in light of Tuesday If the CPI inflation report is weaker than expected, I would be shocked if the FOMC did anything other than raise the Fed Funds rate by half a point and raise the overnight borrowing benchmark to its target range of 4.25% to 4.5%. 15 years level.
Committee votes are likely to be unanimous or nearly unanimous, but not everyone participates.
Former FDIC Chairman William Isaac said, “I hope that Jay Powell stands firm and continues to do what needs to be done.” “I hope they go up at least one point.”
Then there’s the other side.
“This rate hike cycle should end now,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. (…) We don’t need to keep raising rates at this point, but of course we will.”
communication
Behind the unanimous or near-unanimous vote on interest rates is a lively debate about where monetary policy should go from here.
That should be reflected in both the post-meeting statement and Powell’s press conference.
One area where the market is calling for change is that the FOMC has moved from saying “we expect continued increases in the target range to be appropriate” to something more generic like “some increase”. It is an expression that it may be necessary. This will give the Fed more flexibility in its next move, with some markets expecting February could be the last rate hike for a while. The Fed’s next interest rate decision following this is scheduled for February 1st.
Powell will be looked to to clarify where the Commission sees the future of the inflation struggle. He could reiterate that the Fed will raise interest rates and keep them high until there are concrete signs that inflation will return to his 2% target for the central bank.
“Traders will be watching Jay Powell’s Q&A closely. [basis point] It will go up and the FOMC’s plan is to reach higher terminal rates in the long term,” said Victor Masotti, Director of Repo Trading at Clear Street.
The Commission will also update forecasts on inflation, unemployment and GDP. Inflation and GDP forecasts are lower next year, and the unemployment rate is likely to rise slightly.
“Dot Plot” and “Terminal Rate”
The “final rate,” Masotti said, refers to the Fed’s expected end point and the current rate hike cycle.
When the Fed last updated its dot plot (a graph where each FOMC member gets an anonymous “dot” to predict interest rate movements over the next few years), the final interest rate was pegged at 4.6%.
With inflation still rising despite recent reports, endpoints are likely to grow as well. But perhaps not as much as the market feared.
Goldman Sachs said, “We expect a modest rise to 4.75-5% between 5-5.25%. We expect three consecutive 25bp hikes in 2023. [Tuesday’s CPI] The report reduces the risk of a 50bp rate hike in February. “
Isaac, who served as chairman of the FDIC in the early 1980s when inflation was raging and then-Fed Chairman Paul Volcker had to raise interest rates dramatically, pushing the economy into recession, was more flexible. He said that suggesting such an approach could be dangerous.
“People have to have trust in the Fed. That’s what Volcker brought. You knew what he said.” It will be.”
powell presser
Finally, Powell will take the stage at 2:30 PM ET for 45 minutes to answer questions from the press.
At the last few meetings, the chairman has used the session to bolster the Fed’s credibility in fighting inflation and commit to rate hikes until prices return to a firm and steady state.
The market doesn’t always believe him.
Even when Powell used harsh rhetoric, traders—and electronic algorithms that tend to cause short-term market shocks—chosen to focus on dovish qualifiers, boosting stock prices. After a string of relatively positive inflation reports, Powell may need to push a little harder this time around.
RBC’s Porcelli said, “He ought to avoid giving us too much hawkish disgust.” He may not like the recent easing of financial conditions, but the market has eyes.”
Correction: In 2022, the Fed will raise the benchmark borrowing rate by more than a quarter of a percentage point five times. In previous versions the numbers were listed incorrectly.
