The policy decision, due to be announced at 2 p.m. EDT (1800 GMT), will mark the latest step in a synchronized policy shift by global central banks that is testing the resilience of the global economy and the ability of countries to manage exchange rate shocks as the value of the dollar soars.
With investors widely expecting the Fed to raise its key rate by 75 basis points to bring it into the 3.00%-3.25% range, markets could be unsettled by updated quarterly economic projections that will be published at the same time as the general policy statement.
These projections will show where Fed policymakers think interest rates are heading, how long it will take inflation to come down, and how much “pain” is likely to be inflicted on jobs and economic growth in the states. United along the way.
Judging by the past few months, the rewritten economic scenario suggests a tougher fight than expected, with the federal funds rate likely to top 4% by the end of 2022, from the 3.4% projected at the end of 2022. from the last set of projections in June, and rising unemployment.
“With little evidence in hand that inflationary pressures are easing, (Chairman Jerome Powell) is likely to reemphasize the Fed’s commitment to do what is necessary to get inflation on target, even if it means risking a recession,” Deutsche Bank economists wrote late last week. “They (…) will foresee a tightening of monetary policy and greater pain in the labor market.”
Deutsche Bank expects the U.S. central bank to eventually raise its key rate to around 5.00%, close to the 5.25% peak seen between mid-2006 and 2007, when Fed policymakers worried about a bubble in the US housing market, which could amplify tensions throughout the global financial system.
Mr Powell is due to hold a press conference at 2.30pm to explain the latest policy decision, and his tone will determine whether it is interpreted as a hawkish next step with more of the same to come, or as a final part of the rate hike before the Fed reverts to more conventional rate hikes of 50 or 25 basis points as it heads towards a break point.
Powell had to correct himself in real time on the probable trajectory of the Fed twice this year. In June, after he largely ruled out raising rates by three-quarters of a percentage point, a surprise jump in inflation unsettled the Federal Open Market Committee and pushed its members toward a bigger hike. In July, Powell’s comment that the Fed might pass smaller incremental rate hikes was read as indicating an impending political pivot.
Since then, the Fed chief’s tone has become fiercely hawkish and, with the central bank’s favorite measure of inflation overshooting its 2% target by more than three times, another dose of harsh talk is expected.
“Risks are still tilted towards higher terminal policy rates and we expect a relatively hawkish FOMC meeting,” Citi economists wrote on Tuesday.
Warmongering has become the norm globally, with central bankers making interest rate moves not seen since the 1990s, at the end of a fight in the developed world against inflation. which had taken root in the 1970s.
At the start of the month, the European Central Bank, like the Fed, raised its key interest rate by three-quarters of a percentage point for the first time in its history; Sweden’s central bank approved its first percentage point hike in 30 years this week.
The Bank of England and the central banks of Switzerland and Norway will meet this week, and markets expect them to announce significant rate hikes.
Such increases in borrowing costs can feed into each other, altering the dynamics of currencies, prices and trade in a way that prompts other central banks to react, especially in emerging markets where fluctuations in exchange rates and rising dollar interest rates can cause unexpected financial shocks.
Led by the Fed, which is increasingly focused on fighting inflation, the tightening has become so pronounced that some have begun to worry about overbidding.
“Almost everywhere, central banks feel accused of being left behind”, by failing to anticipate to prevent the jump in inflation in 2021, wrote Maurice Obstfeld, the former chief economist of the International Monetary Fund, in an essay published last week by the Peterson Institute for International Economics. “The current danger, however, is not so much that current and planned measures will fail to stifle inflation. It is that they collectively go too far and drag the global economy into an unnecessarily harsh contraction.”
Between the fallout from the COVID-19 pandemic and Russia’s invasion of Ukraine, World Bank President David Malpass warned last week that the global economy could be approaching “a prolonged period of weak growth and of high inflation.”