The Federal Reserve is expected to signal later Wednesdat
that its interest-rate policy will remain unchanged and close to zero through
the end of 2023.
For the first time, the Fed will release its economic
projections for 2023. Economists expect the Fed’s “dot plot” to show that most
officials think rates will remain at 0.125%.
“It’s looking like rate hikes are going to be a 2024 story,
at the earliest,” said Michael Gregory, deputy chief economist at BMO Capital
The Fed will release a policy statement at 2 p.m. Eastern.
Powell will hold a press conference a half hour later.
While the unemployment rate has shown improvement, the lack
of congressional action on another fiscal-aid package leaves the future path of
the economy in doubt. The Fed may note the improved economy but not celebrate
Avery Shenfeld, chief economist at CIBC Capital Markets,
thinks the Fed may adopt “conditional” forward guidance, with officials
pledging not to raise rates until specific economic conditions are met.
This would follow the Bank of Canada’s promise not to raise
rates until inflation is sustainably back to their 2% target.
Most other economists think a change in the Fed’s forward
guidance will be delayed until later this year.
At the moment, the Fed statement says policymakers expect
“to maintain this target range until it is confident that the economy has
weathered recent events and is on track to achieve its maximum employment and
price stability goals.”
Shenfeld said the path of Fed rate policy depends so much on
issues that are impossible to pin down.
“If someone told me that ‘I don’t think they’re going to
raise rates until 2024,’ and someone else told me ‘I think they are going to
raise rates at the end of 2022’, I would say both are reasonable guesses,”
Lewis Alexander, chief economist at Nomura Securities, said
he didn’t think the Fed has forged a consensus on forward guidance.
“We expect the FOMC to adopt this type of outcome-based forward
guidance by the end of the year, but it does not seem ready to do that at this
meeting,” Alexander said in a note to clients.
Instead, the Fed will take smaller steps, like setting the
rationale for their monthly purchases of $120 billion of government bonds and
mortgage-backed assets to advance its economic objectives. At the moment, the
Fed has said the purchases were needed to “sustain market functioning.”
Bigger questions will concern the scale and composition of
asset purchases, and the Fed’s long-term plan with its $7 trillion balance
This will be the first Fed meeting under its new flexible
inflation target strategy. This allows the Fed to let inflation run above 2%,
and essentially calls for rates to remain lower for longer. Economists are
watching to see how the strategy is incorporated in the statement and
Tim Duy, a Fed watcher at the University of Oregon, doesn’t
think this will cause major changes in the Fed’s presentation Wednesday.
“For the moment, the Fed remains content to simply entrench
expectations that the policy path is locked down at zero for the foreseeable
future,” he said.
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