The upcoming policy meeting of the Federal Reserve is not expected to bring any major changes to its interest-rate policy or provide a definite outlook for the near future. However, economists closely follow certain indicators to gain insight into the Fed’s perspective on the economy and interest rates.
The Summary of Economic Projections (SEP)
One of the key areas of focus will be the Fed’s economic forecast, which is known as the Summary of Economic Projections. According to Aditya Bhave, senior U.S. economist at Bank of America, this is arguably the most critical aspect of the September meeting for the markets.
Four Key Points to Pay Attention To
Economists will be particularly interested in the following four areas:
1. Interest-Rate Projection for 2024
Fed officials have emphasized their commitment to maintaining a high benchmark interest rate in order to drive down inflation. Currently, the rate stands within the range of 5.25%-5.%.
In June, the Fed projected four 25-basis-point cuts for next year. However, some economists believe that this projection may be revised downward.
Bhave suggests that the Fed is likely to project only three 25-basis-point cuts for next year.
“They have consistently emphasized the notion of ‘higher for longer,’ and I anticipate they will further lean into this direction,” Bhave explained in an interview.
Additionally, there is a possibility that the median dot plot will indicate even fewer cuts.
“If this scenario unfolds, it would come as a significant hawkish surprise for the markets,” Bhave noted in a research note.
How many Fed officials think rates have peaked?
According to Krishna Guha, vice chairman of Evercore ISI, nearly half of the committee of 18 Fed officials are expected to believe that the central bank has finished hiking rates. Guha suggests that Federal Reserve Chairman Powell will present this as a split vote rather than a clear bias to hike further, which would keep market pricing at around 50-50.
What changes will the Fed make to its economic forecast?
Economists at Bank of America anticipate that the Fed’s forecast for 2023 growth will be revised up from 1% to 2%, considering the strength of the economy.
Regarding inflation, the Fed may lower its core PCE inflation forecast for 2023 from 3.9% to 3.7%. However, core inflation for 2024 could be revised up by two-tenths to 2.8%, reflecting the resilience of the economy.
Furthermore, the Fed’s projection indicates that inflation will reach 2% by 2026.
Will the Fed’s projection of the neutral rate begin to drift higher?
Economists speculate that the Fed might increase its estimate for the longer-term neutral rate. This adjustment holds significant implications, as it would result in an overall upward shift in interest rates. Consequently, this could mean that Americans will not experience ultra-low mortgage rates and other lending rates that were prevalent after the global financial crisis in 2008.
Presently, the Fed’s projected neutral rate stands at 2.5%, encompassing a range of estimates from 2.375% to 3.625%.