Two weeks after Federal Reserve Chairman Jerome Powell pointed to slower interest rate increases, the central bank is poised to do just that when the Federal Open Market Committee meets this week and raises its policy rate by 50 basis points.
Such an increase would follow a series of 75 basis-point increases and lift the Fed’s policy rate to a range between 4.25% and 4.5%.
When considered along with the summary of economic projections and Powell’s news conference on Wednesday, the smaller rate hike will be part of what we expect to be a lift-and-hold policy framework over the next year.
An interesting aspect of the FOMC meeting will be found inside its summary of economic projections and dot-plot forecast of interest rates. There is the possibility that the central bank will set the median dot-plot forecast to 5.125% for next year, in contrast with the consensus forecast of 4.875%.
While we are holding to our forecast of a peak between 5% and 5.25%, it would not be any surprise if the major takeaway following the release of November inflation data on Tuesday and the Fed forecast on Wednesday is a risk of a peak above 5.5% despite the softer economic outlook.
In addition, we expect the median forecast of growth for next year to sink below 1%, which would imply risks around a recession and be in line with our core view of a 65% probability of a recession.
Moreover, we expect the median forecast of the unemployment rate to move closer to 4.5%, up from the current 3.7%, and inflation projections to remain like those published in September, mostly because of the weaker growth outlook.
We expect little to no change in the Fed’s policy statement from November. But it seems that the FOMC will need to address the phrase “ongoing increases” as the Fed slows the pace of its hikes.
One would think that the committee would want to balance that view with somewhat hawkish language around price stability to temper market expectations of policy easing next year.
And these market expectations will almost certainly be one of the primary topics at Powell’s news conference on Wednesday. While we do not think that Powell will stray too far from his recent speech on the labor market and inflation, the questions and answers that follow the likely downgrade of the forecast and risk of a higher rate peak will demand careful explanation.
