As often has been the case, this week’s Federal Reserve meeting will be less about what policymakers are doing now than what they expect to be doing in the future.
In the now, there’s virtually no chance the U.S. central bank will choose to raise its benchmark borrowing rate. Markets are pricing in just a 1% chance of what would be the 12th hike since March 2022, according to CME Group data.
But this week’s meeting, which concludes Wednesday, will feature the Fed’s quarterly update on what it expects for a bevy of key indicators — interest rates, gross domestic product, inflation and unemployment.
That is where the suspense lies.
Here’s a look at what to expect.
The Fed won’t be tinkering with its key funds rate, which sets what banks charge each other for overnight lending but also spills over into many forms of consumer debt.
Historically, and in particular during the era under Chair Jerome Powell, the Fed doesn’t like to buck markets, especially when anticipation is running so strongly in one direction. The funds rate is a lock to stay in its current target range of 5.25%-5.5%, its highest level since the early part of the 21st century.
There’s widespread belief, though, that the Fed will make sure the market knows that it shouldn’t make assumptions about what’s next.
“There’s likely to be a pause here, but a clear possibility that the November meeting is, as they say, a live meeting. I don’t think they’re ready to say, ‘We are now done,'” Roger Ferguson, a former vice chair of the Fed, said on CNBC’s “Squawk Box” in an interview this week.
“This is the time for the Fed to proceed very cautiously,” he added. “In no way should they say we are completely done, because I don’t think they really know that just yet, and I think they want to have the flexibility to do one more if need be.”
The dot plot
One way for the central bank to communicate its intentions is through its dot plot, a grid that anonymously lays out individual members’ expectations for rates ahead.
Markets will be looking for subtle shifts in the dots to understand where officials see things headed.
“I think that they will keep that bias towards higher rates in there and indicate that they are willing to raise the funds rate further if the data start to show that either inflation is not slowing as they expect it to, or if the labor market remains too tight,” said Gus Faucher, chief economist at PNC Financial Services Group.
One key “tell” market participants will be focusing on: the “longer run” median dot, which in Wednesday’s case will be the projection beyond 2026. At the June meeting, the median outlook was for 2.5%.
Should that shift higher, even by a quarter percentage point, that could be a “tacit” signal the Fed will be content to let inflation run higher than its 2% target and possibly rattle markets, said Joseph Brusuelas, chief economist at RSM.
“We’re laying the groundwork to prepare our clients for the inflation targets we think [will] be going up,” he said.
Each quarter the Fed updates its Summary of Economic Projections, or the outlook for rates, inflation, GDP and unemployment. Think of the SEP as the central bank laying a trail of policy breadcrumbs — a trail, unfortunately, that often has left something to be desired.
Particularly over the past several years, the projections have been notably wrong as Fed officials misread inflation and growth, leading to some dramatic policy adjustments that have kept markets off balance.
In this week’s iteration, markets largely expect the Fed to show a sharp upgrade in its June projection for GDP growth this year, along with reductions in its outlook for inflation and unemployment.
“The Fed is going to have to almost double its growth forecasts,” Ellen Zentner, chief U.S. economist at Morgan Stanley, said Tuesday on CNBC’s “Worldwide Exchange.”
While the SEP and dot plot will attract the most attention, potential tweaks in the post-meeting statement also could be a focal point.
Zentner suggested the Fed could change some of its characterizations of policy as well as its view on the economy. One potential adjustment from the July statement could be in the sentence, “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Removing the word “additional,” she said, would send a signal that members of the Federal Open Market Committee are at least considering that no more rate hikes will be needed.
A second potentially potent change would be if in the sentence, “The Committee remains highly attentive to inflation risks,” the Fed were to removed the word “highly.” This could indicate the Fed is growing less concerned about inflation.
“These are tiny little tweaks that shouldn’t be taken lightly, and they would be baby steps toward stopping the hiking cycle,” Zentner said.
The press conference
Following the release of the statement, the dot plot and the SEP, Powell will take the podium to take questions from reporters, an event that generally lasts about 45 minutes.
Powell uses the conference to amplify what the FOMC has already done. He also sometimes has a somewhat different spin from what comes out of the official documents, making the events unpredictable and potentially market-moving.
Markets are betting the Fed has finished this rate-hiking cycle, assigning just a 30% chance to a November increase. If the chair does anything to disabuse the market of that sentiment, it would be meaningful.
Zentner, though, expects the central bank to fall in line with market thinking.
“We do believe that the Fed is done here,” she said. “They just don’t know it yet.”