In many ways, the script has been pre-written for the Federal Reserve’s policy meeting that ends on Wednesday.
With U.S. inflation running at the highest level in 40 years and labor markets tight, Fed Chairman Jerome Powell has already given the green light for a 25 basis point benchmark interest rate hike, the first since 2018, to be followed by a “series” of increases.
The Fed will release a statement and updated economic forecasts at 2 p.m. Eastern, followed by Powell’s press conference at 2:30 p.m. Wednesday.
There will be a lot to digest beyond the headlines. What will economists be paying attention to?
Here are four things to focus on.
How many hikes will the Fed pencil in?
Last December, the Fed penciled in three quarter percentage point rate hikes this year, three more in 2023 and two more in 2024. The total of eight quarter point hikes would bring the Fed’s policy rate up to 2.1%, just below the central bank’s “neutral” rate that neither boosts or restricts growth.
In contrast, the market now sees seven quarter-point hikes this year.
Economists think the Fed will raise these forecasts on Wednesday, but most economists think it will “tread carefully” and only add a couple more hikes for this year, said Derek Holt, head of capital market economics at Scotiabank.
The risk is the Fed gets more aggressive. Economists at Jefferies see the Fed pointing to five rate hikes this year and five in 2023.
If the Fed signals they will move rates into “restrictive” territory, above 2.5%, that will be a hawkish sign. Markets don’t think the Fed will get into a restrictive stance, but many economists think it is inevitable. Stanley of Amherst Pierpont thinks rates will ultimately have to rise above 3% to bring inflation down.
What will Powell say about the impact of the Russia-Ukraine war?
Powell has said that the war raises risks to the outlook for the U.S. economy, but has not given much detail. Economists are divided – with some thinking the conflict will make the Fed more dovish, while others think hawkish.
If Powell plays down the geopolitical risks, that will be hawkish, said Tom Simons of Jefferies.
What will message be about inflation?
Expect Powell to be in inflation-fighting mode, economists said.
“Inflation has to be job one at this point,” said Stephen Stanley, chief economist at Amherst Pierpont.
He will stress that if inflation does not peak and begin to moderate later this year, the Fed could move faster.
Will Fed give details about plans to shrink its balance sheet?
The Fed’s balance sheet doubled to almost $9 trillion during the pandemic. Shrinking it is another form of removing monetary stimulus from the economy. Fed watchers are divided about how much detail the Fed will give on its plans. Some, like Deutsche Bank, think the Fed will give specifics on how rapidly it will allow the portfolio to shrink – setting up an announcement of the start of the program at the Fed’s next meeting in early May. Others think the Fed will wait until June or July to start.