Montreal Gazette

Fed to reveal new projection­s with investors on alert for rate liftoff timing


U.S. Federal Reserve officials will lay bare how soon and how often they think the economy will need interest rates rises over the next three years when they release new forecasts at their policy meeting on Wednesday, with investors on alert for a faster pace of tightening.

The so-called “dot plot,” released quarterly, charts policy-makers' projection­s, on an anonymous basis, for economic growth, employment and inflation, as well as the timing of interest rate rises.

It will show whether most are sticking to recently expressed views that the Delta variant of the coronaviru­s, which has dented economic activity, will have a short-lived effect on the recovery despite the current turbulence and uncertaint­y it is causing.

This week's set of dots also will include policy-makers' forecasts for 2024 for the first time.

Interest rates have been near zero since the beginning of the COVID-19 pandemic with the Fed vowing not to raise borrowing costs until the economy has fully healed.

According to the Fed's new framework, that means a greater emphasis on achieving maximum employment along with its twoper-cent average inflation goal.

Hotter-than expected inflation despite some recent moderation is testing policy-makers' commitment to that new framework and could cause the median of the Fed's forecasts for a liftoff in interest

The dots are not promises or commitment­s, but it's still the best the market has to go by ...

rates to switch to 2022 from 2023 at the June meeting.

For that to happen, only three policy-makers would need to bring forward their projection­s, and a shift of just two would result in a dead-heat split inside the Fed over whether liftoff is in the cards for next year or later.

“We all know the dots are not promises or commitment­s, but it's still the best that the market has to go by to what policy will be in the future,” said Roberto Perli, an economist at Cornerston­e Macro and former Fed staffer. “The risks are skewed to the upside.”

There are rising expectatio­ns the central bank will at least use its upcoming meeting on Sept. 21-22 to signal it plans to start reducing its massive bond purchases, also put in place in early 2020 to support the economy's recovery, in November if incoming data holds up, amid the fastest economic recovery in history from a brief recession last year.

Fed officials argue the asset purchase program has run its usefulness given that demand, which it most directly affects, has rebounded even if the supply of both labour and goods has been constraine­d.

The scaling back could be completed as early as mid-2022, clearing the way for the Fed to lift interest rates from near zero any time after that. The consensus among economists polled by Reuters is for rates to remain near zero until 2023 but more than one-quarter of respondent­s in the September survey forecast the Fed raising rates next year. If the Fed's 2022 and 2023 median interest rate projection­s stay the same, attention will focus on 2024 as investors parse the pace of rate rises once liftoff begins.

It will also show how many policy-makers, if any, still see interest rates on hold until at least 2024. In June, five out of the 18 policy-makers saw rates staying pat until the end of 2023. Currently, futures on the federal funds rate, which track short-term interest rate expectatio­ns, are pricing in one rate hike in 2023 and one or two additional increases in 2024, but the latest Primary Dealer survey, which the Fed consults to get a read on market expectatio­ns before each meeting, shows three additional rate hikes.

If the Fed pencils in three or more hikes at this week's meeting for 2024, “that would deliver a hawkish sign that could more than offset any dovish messaging on tapering,” said Michael Pierce, an economist at Capital Economics.

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