The Federal Reserve expects another historic rate hike on Wednesday

All eyes are on the Federal Reserve as the central bank begins a two-day policy meeting on Tuesday, as officials are expected to raise short-term interest rates by three-quarters of a percentage point at the end of their meeting on Wednesday.

In the face of stubborn inflation, officials are expected to raise the central bank’s benchmark interest rate – federal funds rate — to a new range of 3.0% to 3.25% from the current range of 2.25 to 2.50%. This would mark the third consecutive 75 basis point rate hike since June, taking rates to their highest level since 2008.

The Fed is likely to signal that it will raise rates more aggressively and expects rates to be higher for longer when it releases a summary of each staff member’s rate expectations, known as a “dot plot.”

“With inflation running rampant, Powell will try hard not to change the perception of a hawkish Fed and underline the FOMC’s determination to act to reduce inflation to more acceptable levels,” wrote Roberto Perli, global head of macro policy at Piper Sandler in a note to clients. “He will also probably continue to talk about “pain” is required. to achieve that goal, which is a polite way of saying that the Fed is willing to tolerate a recession in order to achieve its inflation goal.’

Markets expect the benchmark interest rate to rise above 4% by the end of the year, according to CME Group. However, how high and how fast interest rates rise from there, and how long they remain high, remain open questions.

“They’ve recognized for a while that it’s going to be a bumpy ride as they continue to reduce inflation,” said Andrew Patterson, senior international economist at Vanguard Group said Yahoo Finance Live. “But [Wednesday] we would expect them to really emphasize not necessarily the terminal tariff – they won’t give you a lot of clarity on that, they might hint at it – but really how long they’re going to keep the tariffs at that terminal tariff.”

Federal Reserve Chairman Jerome Powell emphasized keeping interest rates high to fight inflation, noting that the Fed does not want to risk Americans’ inflation expectations continuing to rise and that history warns against premature policy easing. Meanwhile, Fed Vice Chairman Lael Brainard said monetary policy will have to be tight for a while and that the Fed will keep it tight for as long as necessary to reduce inflation.

Federal Reserve Chairman Jerome Powell attends a news conference in Washington, DC, July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)

Federal Reserve Chairman Jerome Powell attends a news conference in Washington, DC, July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)

Perley expects the Fed’s rate projections to be “significantly” higher than in June — when officials predicted the Fed rate would end the year at around 3.4% and 3.8% in 2023 — and also so predicts the Fed will raise interest rates to between 4% and 4.25% by the end of the year.

The Federal Reserve will also release a summary of its quarterly economic forecasts, which will include Fed staff’s outlook on inflation, unemployment and the overall economy. Given expectations for higher interest rates, many economists expect officials to cut their GDP growth forecasts this year while raising their estimates of unemployment and inflation.

“We do see recessionary risk, especially if the Fed continues to be hawkish,” Luke Tilley, chief economist at Wilmington Trust, wrote in a note to clients. “They can overdo it and overcorrect it. And that is a risk to the outlook and could send us into recession.”

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