As the Federal Open Market Committee (FOMC) prepares to reveal its rate decision at 2 p.m. ET on Wednesday, market watchers and economists are speculating about the Federal Reserve’s next actions.
What To Expect From The FOMC
The consensus view is that the Fed is likely to maintain its current interest rates in the range of 5.25%-5.5%.
According to CME Group’s FedWatch Tool, which calculates interest rate probabilities based on Fed futures prices, there is a 99% chance of rates staying unchanged.
Looking ahead to the Nov. 1 meeting, the market currently assigns a 70% probability of another hold.
Table: Market-implied Fed Interest Rate Probabilities
| Fed funds target rate | 09/20/2023 | 01/11/2023 | 12/13/2023 | 01/31/2024 | 03/20/2024 | 05/01/2024 | 06/12/2024 | 07/31/2024 | 09/18/2024 | 11/07/2024 | 12/18/2024 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 450-475 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 1.9% | 8.2% | 18.7% | 25.7% | 28.2% |
| 475-500 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 4.9% | 14.1% | 24.9% | 31.2% | 29.2% | 22.3% |
| 500-525 | 0.0% | 0.0% | 0.0% | 0.0% | 13.2% | 28.5% | 34.9% | 34.9% | 27.7% | 19.5% | 10.9% |
| 525-550 | 99.0% | 70.8% | 59.8% | 59.8% | 54.4% | 44.8% | 34.9% | 23.4% | 13.0% | 7.4% | 3.2% |
| 550-575 | 1.0% | 28.9% | 35.4% | 35.4% | 28.7% | 19.4% | 12.7% | 6.9% | 3.0% | 1.5% | 0.5% |
| 575-600 | 0.0% | 0.3% | 4.7% | 4.7% | 3.7% | 2.3% | 1.4% | 0.7% | 0.3% | 0.1% | 0.0% |
Hawkish Vs. Dovish Divide
In addition to the rate decision and statement, the Fed will unveil the “dot plot,” displaying member projections for the federal funds rate, as well as the median of these estimates.
June’s dot plot showed interest rates at 5.6% at the end of 2023, implying a further interest rate hike from current levels.
Analysts are divided on whether the Fed will pencil in an additional rate hike for 2023. Bank of America projects a further rate increase in November, taking a hawkish stance. In contrast, Goldman Sachs believes the Fed might hint at the possibility in the dot plot, but won’t execute it.
Looking ahead to 2024, the median dot plot from June projected a reduction of 100 basis points in interest rates. Given the recent robust performance of the economy and the upswing in inflation observed in August, it appears improbable that the Fed will opt for further rate cuts in 2024.
Instead, there is a potential risk of a reduction in the number of anticipated rate cuts to 75 basis points, a development that could be interpreted as a hawkish stance by the market, supporting the higher-for-longer hypothesis.
This scenario has the potential to introduce volatility in the stock market, including the S&P 500, which is closely tracked by the SPDR S&P 500 ETF Trust SPY.
Economic Projections And Outlook Insights
Beyond the rate decision, the FOMC meeting will unveil updated summary economic projections, incorporating data on GDP growth, inflation, and the unemployment rate for the coming years.
The FOMC is poised to revise its GDP growth and unemployment rate forecasts in a more positive direction. The 2023 real GDP growth projection was 1% in June, and many analysts believe that it could be raised to near 2%.
June’s projections indicated headline PCE at 3.2% in 2023 and 2.5% in 2024, with the core rate at 3.9% in 2023 and 2.6% in 2024. The critical question is whether the Fed believes the disinflation trend will persist, or if the recent surge in oil prices will alter inflation projections.
Key Points to Monitor During Chair Powell’s Press Conference
At 2:30 p.m. ET, all eyes will be on Chair Jerome Powell during his press conference. He is likely to field questions regarding the potential inflationary impact of the recent rally in energy prices.
In a public speech at Jackson Hole on Aug. 25, Powell noted, “Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks.”
Another likely topic of discussion will revolve around the concept of the R-star, or the long-run neutral interest rate, which neither stimulates nor depresses the economy. Initially set at 2.5% in June, if it is revised higher, say to 2.75%, it could have hawkish implications.
Former Treasury Secretary Larry Summers has argued that higher deficits, driven partly by increased defense spending and investments in energy and artificial intelligence, are elevating the natural interest rate level.
However, Powell mentioned at the Jackson Hole symposium that the Fed cannot definitively pinpoint the neutral interest rate, leading to uncertainty about the precise level of monetary policy restraint.
Read now: FOMC Meeting Preview: What Will The Federal Reserve’s Next Move Be?
Photo: International Monetary Fund on Flickr and Shutterstock
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