It is highly unlikely that the U.S. central bank will opt to raise its benchmark borrowing rate during its upcoming two-day meeting, concluding on Wednesday. The focus of the meeting will revolve around the Federal Reserve’s quarterly update on its expectations for various crucial indicators, including interest rates, gross domestic product (GDP), inflation, and unemployment. This meeting aims to convey a message to the markets that they should avoid making assumptions about the future, emphasizing that it is more about what the Fed anticipates doing down the road than immediate actions.
At present, the chances of the U.S. central bank increasing its benchmark borrowing rate are virtually non-existent. Market data from CME Group suggests that there is merely a 1% probability of this happening, which would mark the 12th rate hike since March 2022. However, the primary suspense surrounding this week’s meeting lies in the Fed’s quarterly update on these key indicators.
Interest rates are expected to remain unchanged, with the Federal Reserve unlikely to tamper with its key funds rate. This rate not only determines the interest rates at which banks lend to each other overnight but also influences various forms of consumer debt. Given the current market sentiment, particularly under the leadership of Chair Jerome Powell, the Fed prefers not to go against market expectations. Therefore, the funds rate is expected to remain within its existing target range of 5.25% to 5.5%, the highest level seen since the early 21st century.
However, there is a widespread belief that the Fed will emphasize that the market should not assume anything about future rate movements. According to Roger Ferguson, a former vice chair of the Fed, this is a moment for the Fed to proceed cautiously, leaving the possibility open for further adjustments in the future.
One way the central bank communicates its intentions is through the “dot plot,” which illustrates individual members’ expectations for future rates. Analysts will be scrutinizing subtle shifts in these dots to gauge officials’ views on where things are headed. The “longer run” median dot, projecting beyond 2026, is of particular interest. Any upward shift in this projection, even by a quarter percentage point, could suggest that the Fed is willing to let inflation exceed its 2% target, potentially impacting markets.
The Summary of Economic Projections (SEP), updated quarterly by the Fed, outlines expectations for rates, inflation, GDP, and unemployment. These projections have often been inaccurate in recent years, leading to significant policy adjustments. This week’s SEP is anticipated to show a substantial increase in the GDP growth projection for this year while reducing inflation and unemployment outlooks.
Apart from the dot plot and the SEP, changes in the post-meeting statement could also garner attention. Modifications in the language used by the Fed, such as removing the word “additional” or “highly” from certain sentences, may signal the central bank’s stance on future rate hikes and inflation concerns.
Following the release of these statements and projections, Chair Jerome Powell will hold a press conference to address questions from reporters. Powell’s comments can have a significant impact on the markets, as he often provides additional insights and perspectives beyond the official documents.
Market sentiment currently suggests that the Fed has completed its rate-hiking cycle, with a limited likelihood of a rate increase in November. Any deviation from this sentiment by Chair Powell during the press conference could have meaningful implications. Nevertheless, many analysts anticipate that the Fed will align with the market consensus, signaling a cautious approach moving forward.
In conclusion, the upcoming Federal Reserve meeting is expected to maintain interest rates, with a focus on communicating the central bank’s future intentions through the dot plot, SEP, and post-meeting statement. Chair Powell’s press conference will be closely watched for any divergence from current market expectations regarding the future of interest rates and inflation.