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During the Federal Reserve’s last battle with high inflation in the 1970s and 1980s, Fed officials didn’t talk much at all publicly. When pressed for information on Capitol Hill about the outlook for the economy and interest rates, former Fed Chairman Paul Volcker would disappear behind a thickening cloud of cigar smoke. (Smoking was allowed at hearings in those days.)
Forty years later, there will be no ashtrays in sight when Fed Chairman Jerome Powell holds a post-meeting news conference. And investors and economists are going to get a slew of information, not just smoke, from the central bank.
“After the Fed meeting, it’s going to be like information overload,” said Ryan Sweet, chief U.S. economist at Oxford Economics, in an interview.
In general, economists expect a hawkish Powell Wednesday.
Financial conditions have eased since the Fed’s November meeting, which doesn’t help dampen inflation.
The yield on the 10-year Treasury note
TMUBMUSD10Y,
has fallen sharply to 3.49% from 4.21% just after the Fed’s previous policy meeting. The S&P 500 stock-market index
SPX,
also has gained ground.
“This has been a struggle for this FOMC the whole year,” said Jan Groen, chief U.S. macro strategist at TD Securities, in an interview.
“Powell had to come out at Jackson Hole with a big speech and we had this super hawkish press conference in November. And then again, they lost control of it. So I think, again, he has to do something similar,” Groen said.
Here’s a look at what experts will be watching for when the Fed concludes the two-day meeting on Wednesday.
Slowing down the pace of rate hikes
The Fed is widely expected to slow to to raise its benchmark rate by a half percentage point, a slower pace than the four 0.75 point rate hikes seen since June. This will bring the Fed’s benchmark rate to a range of 4.25%-4.5%.
While some economists argued that the strong November jobs report put a 0.75 point hike back on the table, most don’t agree. “For all intents and purposes, that ship sailed at the November FOMC meeting ,” said Tim Duy, economist at SGH Macro Advisors. “A June-like adjustment isn’t happening here,” he added, referring to the Fed’s surprising last-minute decision to engineer the first 0.75 percentage point hike.
Signaling more hikes to come
To keep from sounding dovish with the slower rate hikes, Powell and the Fed will highlight again that rates need to go higher.
Economists said the Fed will retain a key phrase from the November statement that the central bankers expected “ongoing increases” in the benchmark interest rate.
Ellen Zentner, chief U.S. economist at Morgan Stanley, argued the Fed might change the wording to “some further increase” in the benchmark rate will be appropriate in order to give the Fed flexibility.
Avery Shenfeld, chief economist of CIBC World Markets, thinks that it is premature for the Fed to soften the wording.
“When you still have another 50 basis points to go that you’re pretty sure you’re going to do and you might have to do more than that, you’re not going to change the wording,” said Shenfeld, in an interview.
Shenfeld thinks the Fed can stop hiking at 5% and hold until 2024.
How high will rates go and how long will they stay there?
In the last “dot plot” in September, the Fed forecast that the top end of its benchmark rate would have a top out at 4.75%. Groen of TD Securities says the Fed’s new dot plot will push up the terminal rate up, but only slightly to 5%.
In order to move the median higher, there has to be a really big move in the distribution of the dots, Groen said.
The key for markets is how many Fed officials pencil in their dot above 5%, Groen said. In September, no Fed officials projected the terminal rate above 5%.
Some economists think the Fed might push up the high end of the terminal range to 5.25%.
In order to try to underline that it intends to hold rates at a high level, the Fed will project no rate cuts in 2023, economists said.
More pain on the table
With the Fed projecting higher interest rates, economists expect the Fed forecast to reflect more pain for the economy.
“From 2023-2025, we expect that GDP growth will be revised lower, the unemployment rate will be revised higher and inflation will also be revised lower,” said economists at Bank of America, in a note to clients.
In September, the Fed projected the unemployment rate would rise to 4.4% in 2023 before slowly coming down. The unemployment rate was 3.7% in November.
The market needs to see a forecast of softer inflation but not a deep recession, Shenfeld said.
The market is thinking that inflation is going to come down quickly and that growth will also thinking that the economy will be so weak the Fed will have to come to the rescue, Shenfeld said.
Press conference
With so many uncertainties facing the Fed, “the press conference is likely to be a doozy,” said Dan North, senior economist at trade credit insurer Allianz Trade North America.
“The statement is carefully prepared, carefully worded. In the press conference, it is where Powell might reveal more about what the thinking is and therefore might reveal more about the future path of tightening might be and when there might eventually be a stop and a pivot.”
“We’re at the precipice now,” with the Fed perhaps not far from stopping, he added.
One way to measure Powell’s hawkishness is how he talks about the risk of overtightening.
At his press conference in November, Powell said that if the Fed were to overtighten, “we could use our tools to support the economy.”
Then markets took a dovish signal from Powell’s comment a week ago that the central bank didn’t want to overtighten.
“We should expect a more austere tone in December,” said Krishna Guha, vice chairman of Evercore ISI, in a note to clients.
