Thursday, October 28, 2021

Fed will unveil new projections with investors on alert for rate liftoff timing

Federal Reserve officials will lay bare how soon and how often they think the economy will need to raise interest rates over the next three years when they issue new forecasts at their policy meeting on Wednesday, prompting investors for dire momentum. on alert.

The so-called “dot plot”, issued quarterly, charts policymakers’ projections, on an anonymous basis, for economic growth, employment and inflation as well as the timing of interest rate increases.

This will show whether most are clinging to the views expressed recently that the delta version of the coronavirus, which has hit economic activity, will have a short-term impact on the recovery due to the current unrest and uncertainty. This week’s points will also include policymakers’ forecasts for 2024 for the first time.

Interest rates have been near zero since the start of the COVID-19 pandemic, with the Fed vowing not to raise the cost of borrowing until the economy fully recovers. According to the Fed’s new structure, that means placing more emphasis on maximizing employment with its 2% average inflation target.

Higher-than-expected inflation despite some recent moderation is testing policymakers’ commitment to that new framework and could lead to the middle of the Fed’s forecasts for a liftoff in interest rates from 2023 to 2022 at its June meeting.

For that to happen, only three policymakers would need to bring their projections forward, and a shift of just two would result in a dead-heat split inside the Fed, whether liftoff is in the cards next year or later.

“We all know the point is not a promise or a commitment, but it’s still best to judge what policy the market will have in the future,” said Roberto Perli, an economist at Cornerstone Macro and a former Fed employee. “The risks are skewed upwards.”

Expectations are rising that the central bank will use its upcoming meeting on at least 21-22 September to signal that it plans to begin reducing its massive bond purchases, which are expected to start in early 2020. If data coming in November is placed to support the economy’s recovery, the data remains amid the sharpest economic recovery in history after a brief slowdown last year.

Fed officials argue that the asset purchase program has driven its utility, noting that demand, which most directly affects it, has rebounded even though the supply of both labor and goods is disrupted.

The scaling back could be completed by mid-2022, paving the way for the Fed to raise interest rates above zero at any time thereafter.

The general consensus among economists surveyed by Reuters is that rates will remain near zero until 2023, but more than one-quarter of respondents to the September poll forecast the Fed’s rate hike next year.

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If the Fed’s average interest rate projections for 2022 and 2023 remain the same, the focus will be on 2024 as investors look at the pace of rate increases after liftoff begins. It will also show how many policymakers, if any, still see interest rates withheld until at least 2024. In June, five out of 18 policymakers kept rates stable until the end of 2023.

Currently, futures on the federal funds rate, which tracks short-term interest rate expectations, are pricing in one rate hike in 2023 and one or two additional hikes in 2024, but the latest primary dealer survey, which the Fed reads. Provides advice on market expectations prior to each meeting, reflecting three additional rate hikes.

Federal Reserve Building
The Federal Reserve building in Washington on May 1, 2020. (Kevin Lamarck/Reuters)

If the Fed pencils in three or more hikes at this week’s meeting for 2024, said Michael Pearce, an economist at Capital Economics, “it would send a terrifying signal that would more than offset any message on the tapering off.” could.”

mixed bag on forecasts

The extent to which policy makers change their other economic forecasts can also provide valuable insight. Some expect the Fed to change its expectation of the level to which interest rates could rise, which is currently seen as 2.5 percent, but their forecasts on US economic growth this year and this year and next Revision may be seen in inflation projections for the year.

Economists are lowering their GDP estimates for the current quarter, citing weak automotive sales as inventory shortages persist, and the recent delta in COVID-19 infections by varsity. There has been an increase, although data released last Thursday showed an unexpected increase in US retail sales. in August.

Inflation projections can prove to be more thorny. Fed Chair Jerome Powell, still awaiting whether he will be re-nominated by President Joe Biden to his post for a second term, has firmly held the view that inflation is more transitory than expected, Although he and others have acknowledged that it could stall for more than this year amid persistent supply constraints.

Last week, Labor Department data showed that underlying consumer prices rose at their slowest pace in six months in August, suggesting that inflation was probably peaking.

Some other Fed officials are more concerned and many have cited the possibility that high inflation will persist and cause inflation expectations to rise as asset purchases are made to allow time for faster rate increases if necessary. causes it to decrease quickly.

Reuters

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This News Originally From – The Epoch Times

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