Fed Meeting Is Coming Today. Here's What To Watch
The Federal Reserve's highly anticipated policy decision will come at 2 p.m. ET on Wednesday, and officials are widely expected to fire off another three-quarter point rate hike — its third in a row.
Fed Chair Jerome Powell speaks at 2:30 p.m. ET, and he is expected to emphasize that the central bank will do what it takes to fight inflation and it is unlikely to reverse the rate hikes anytime soon.
Here are some signposts investors are paying close attention to:
• How large a rate hike on Wednesday?
According to the CME's FedWatch tool, rate futures traders are pricing in an 84% chance of a 75bps interest rate increase to a range of 3% to 3.25% and a 16% probability of a 100bps of tightening at 2:50 a.m. ET on Wednesday.
• The 'dot-plot' chart for the Fed's benchmark rate
In June, the Fed's last forecast estimated the terminal rate for fed funds to be at 3.8% in 2023. However, economists now expect the Fed's key policy rate to be above 4% this year.
Goldman Sachs economists, in a report, said they expect the median forecast of Fed officials to show the funds rate at 4% to 4.25% at year-end, with another hike to a peak of 4.25% to 4.5% in 2023. They then expect a cut in 2024 and two more in 2025.
• Will Fed projections show an economic recession?
In June, the Fed forecasted the unemployment rate would be 3.7% this year. Fed officials also expected unemployment to rise to 3.9% in 2023 and 4.1% by 2024. The economy would continue to grow at just under a 2% annual rate over the three-year forecast. Given the recent inflation data and the likelihood of a rise in interest rates, the Fed is likely to lift inflation expectations, raise unemployment estimates, and lower GDP forecasts.
"I think they're going to be a little light on the unemployment rate. I'm in the camp that they have to really increase the unemployment rate to really make progress with inflation." Morgan Stanley Investment Management's head of macro strategies for global fixed income, Jim Caron said.
Caron also said the Fed's rate hiking is a process that will increase the risk of recession,"By increasing recession risks, you lower inflation risks because it's all about reducing demand in the economy."
The Fed will also push up its expectations for inflation.
The Fed's preferred inflation gauge is the personal consumption expenditure index(PCE). Economists at Citi see an increase to 5.7% in headline PCE inflation this year. They see officials predicting a 3% pace next year and a 2.4% rate in 2024, within striking distance of the central bank's 2% target.
Source: Bloomberg, Dow Jones, CNBC, Yahoo Finance
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