We expect that the Federal Open Market Committee this week will lift the federal funds policy rate by 50 basis points to a range between 1.25% and 1.5%, which the market has already priced in and should be of little surprise to investors, the public or other policymakers.
What is of more interest is how the Fed attempts to finesse what will be a likely downgrade of the growth path and employment over the next two years as well as the probability of higher inflation.
More important, what will the median dot plot of the federal funds rate be and how will that affect the current implied path of the policy rate where the market has priced in an above 3% rate by the end of the year?
We expect that median dot plot for this year will be roughly 2.625%, while the median for next year will be revised up to 3.125% with 2024 to be revised up to at least 3.5%.
We are fairly certain that the FOMC’s summary of economic projections, which will be released on Wednesday, will point to:
- A slower pace of growth: 4.3% in March is too strong.
- An unchanged unemployment rate: 3.5% seems about right with a revision upward to 3.8% in 2024.
- Greater headline and core inflation: Core inflation at 4.1% is somewhat softer than the pace of actual inflation.
- No change in the balance sheet policy: The central bank will not begin selling mortgage-backed securities in the near term.
We do not expect the Fed to alter its forecast for long-run growth or unemployment
Beyond that, we expect that Federal Reserve Chairman Jerome Powell will use his news conference to reiterate that the central bank will most likely lift the policy rate by 50 basis points again in July. He may also choose to tip his hand on any intentions to do so again in September, which given the broadening out of inflation is appropriate.
We do not believe that there is any appetite or consensus on the committee for a 75-basis-point hike at this meeting or in July.
Inside the policy statement, we do not anticipate much change. Ironically, given the downgrade to growth that will most likely define the summary of economic projections, the Fed will be quite optimistic on growth in the current quarter, and will certainly highlight factors supporting that growth that are also pushing inflation higher.
There will probably be modest changes to the discussion of risks around growth and inflation linked to hostilities in Ukraine and supply chain issues related to China.