Fed to hike and steepen its rate policy path

The Federal Reserve is poised to raise interest rates Wednesday for the first time since 2018, with investors focused on how aggressive central bankers plan to be in tackling the hottest inflation in four decades.

The Federal Open Market Committee is all but certain to raise rates by a quarter percentage point at the conclusion of its two-day policy meeting, after Chair Jerome Powell told lawmakers earlier this month that he favored such a move.

The panel will release a statement and forecasts, including the “dot plot” chart that displays central bankers’ projections on interest rates, at 2 p.m. in Washington. Powell will hold a virtual press conference 30 minutes later.

“They want to send a reassuring message that they absolutely have the resolve to cool off inflationary pressures and can go faster if they need to, or slower,” said Julia Coronado, president of MacroPolicy Perspectives. “They are trying to achieve macroeonomic stability, an extremely difficult job right now.”

Fed Forecasts

The FOMC’s fresh forecasts are likely to project four interest-rate hikes in 2022 and three in 2023, according to economists surveyed by Bloomberg. That would be up from three increases this year flagged in its December dot plot. Yet there’s quite a bit of uncertainty over the committee’s thinking and markets are pricing in seven rate hikes in 2022, or one every meeting.

“Dots for 2022, 2023, and 2024 and then any forward guidance on rates, either in the statement or from Powell’s presser” will be the focus of investors, said Stephen Stanley, chief economist at Amherst Pierpont.

The 2024 dots could prove important as well, as they could show whether the committee expects to raise the Fed’s benchmark overnight policy rate above its neutral setting to cool down inflation. Neutral refers to the rate that neither speeds up nor slows down the economy. It was estimated to lie around 2.5% in the Fed’s December quarterly forecasts.

“Eventually they need to move up to a higher terminal value,” said Neil Dutta, head of economics at Renaissance Macro Research. “If inflation is stickier then I would expect them to demonstrate they need to do more.”

The FOMC statement is likely to say that the committee expects to make future hikes in the target rate as it confronts inflation, though it’s certain to hedge any language to note that plans will depend on incoming data. The statement may acknowledge that economic growth has moderated this year and that there are new uncertainties caused by the Russian invasion of Ukraine.

The committee could tweak its language in discussing ongoing inflation, adding a reference to higher energy and commodities prices and possibly “tight resource utilization,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

Balance Sheet Update

The FOMC completed its program of asset purchases this month, and at its last meeting announced general principles around shrinking the balance sheet through runoff of maturity of existing securities.

Officials could lay out more details on the pace at which they’ll allow their massive $8.9 trillion balance sheet to shrink. That may include setting out caps on how many billions of dollars worth of Treasuries and mortgage-backed securities will be allowed to mature every month without reinvestment, something that Powell told Congress earlier this month would be discussed at this meeting.

If the process is far-enough along, the committee could also provide an update on when it expects to begin allowing the balance sheet to shrink.

Press Conference

Powell is likely to be quizzed by reporters on topics including the Russia invasion and its effect of the economy, recent inflation reports, and whether he has a 2022 plan in mind for raising rates at every meeting or taking a more cautious approach that sees them go more gradually.

Balancing the concerns about inflation and growth will be a key theme, said Lindsey Piegza, chief economist with Stifel Nicolaus & Co.

“Is the Fed willing to tighten into recession? Is there any comment to the effect of getting inflation under control is the Fed’s primary goal no matter the costs?” she asked. “There is lots to ask, but not sure we will get a lot of clarity.”