The FOMC meeting will be the marquee occasion of a packed few days of high-risk events this week. Policymakers will keep rates unchanged at 5.25 – 5.50%, but their guidance in the form of new economic projections and dot plots will be key. Fresh US inflation data released today should confirm the disinflation process but won’t change the widely anticipated decision to stand pat.
The main focus will be on those updated dot plots and economic forecasts which come amid a major dovish repricing of Fed rate expectations in recent weeks. The sharp fall in Treasury yields has caused an easing in financial conditions, which is undoing some of the Fed’s previous policy tightening and rate hikes. This seems too early for officials and so a push back against this is widely predicted.
This could be done with continued reference to strong growth and a still-solid labour market. That will mean the policy rate projections, which currently have just 50bps of cuts for next year, disappoint money markets that are pricing in over 100bps of policy easing in 2024. There is a chance investors will look through these dots given their poor track record. But if they don’t, the potential reaction could be strong as was the case in September.
Expectations are for modest revisions lower in inflation and the unemployment rate, while growth should be lifted higher. Next year’s projections will be in focus and could also cause sharp volatility in markets. Policymakers might forecast GDP higher in a hawkish signal, but then mark inflation down which would justify another rate cut for 2024.
Chair Powell is likely to continue his style of downplaying the dots and projections in his press conference after the statement. The Fed Chair warned in his final pre-blackout speech at the start of the month that policymakers are not talking about policy easing any time soon. If he reaffirms this stance firmly, stock markets could struggle to see a Santa rally, though the dollar might enjoy the end of year ride.
Here are the key numbers to know ahead of the meeting:
