Here’s everything the Fed is expected to do on Wednesday

“This will be the third meeting in a row that the Fed remains on hold, and in our view, means the Fed sees itself as likely done with its hiking cycle,” Michael Jaben, US economist at Bank of America, said in a note to clients. . .

While acknowledging that future inflation acceleration may force the Fed to raise interest rates further, “we believe a cool economy is more likely and that the narrative should shift in the direction of cuts over increases in 2024,” Jabin added.

This move toward cuts, though likely expressed in a subtle way, will represent a major focus for the Fed after 11 interest rate hikes.

Along with announcing interest rates, the Fed will also update its forecasts on economic growth, inflation and unemployment. Chairman Jerome Powell will also hold his usual press conference after the meeting, where he could either discuss a strategy for easing policy now that inflation is slowing, or continue to talk tough, an outcome that could rattle markets.

Here’s a quick summary of what to expect:

In its statement issued after the meeting, the Federal Open Market Committee, which sets interest rates, will almost certainly say it will keep the benchmark overnight borrowing rate in a range of 5.25% to 5.5%.

It is also possible to make some language adjustments to the committee’s assessment of employment, inflation, housing and overall economic growth.

For example, Bank of America believes the committee may drop its reference to “additional policy tightening” and simply say it is committed to getting inflation back to 2%.

Likewise, Goldman Sachs sees the possibility that the statement will exclude a characterization of tightening financial conditions and perhaps make some other small changes that have been used to express a bias towards higher interest rates.

Financial conditions, a matrix of economic variables and stock market prices, have eased significantly since the conclusion of the last Fed meeting on November 1.

“The pause is pretty much guaranteed,” said Liz Ann Saunders, chief investment strategist at Charles Schwab. “But I wouldn’t be surprised if there was, if not in the statement, during the press conference, a little pushback on what was an easing of financial conditions. … Powell is going to have to address that.”

If there is a signal toward impending interest rate cuts, it will happen in the Fed’s closely monitored grid of individual members’ forecasts known as the “dot chart.” Markets watch the “midpoint”, or midpoint, of all members’ expectations for the next three years, as well as the longer term.

One immediate change to the chart will be the removal of the previously noted price increase this year.

Furthermore, market prices are aggressive. Traders in federal funds futures are cutting interest rates to start in May 2024 and continue until the Fed cuts at least a full percentage point from the key rate before the end of the year, according to CME Group Accounts.

“That will be very important, because much of the rally in stocks has been based on a dovish pivot, with interest rate cuts coming,” said Quincy Crosby, chief global strategist at LPL Financial. “If they yield and agree even slightly with the market, the market will go higher and higher.”

However, most Wall Street strategists and economists see a more cautious approach. For example, Goldman Sachs has brought forward its forecast for the first cut, but only to the third quarter of next year, which is not in line with market prices.

“A lot has to happen for them to move forward soon,” Jan Hatzius, chief economist at Goldman Sachs, said recently on CNBC. “The second half of the year is more realistic than the first half.”

“I’m not saying it won’t happen, I just think it’s too early based on the current set of data points,” Schwab’s Saunders added. “In the end, the bond market may be right [about rate cuts]“But it may not be without some economic pain between now and March.”

Each quarter, FOMC members also release their forecasts for key economic variables: gross domestic product, inflation as measured by the Commerce Department’s core personal consumption expenditures price index, and unemployment.

In September, the committee noted slowing GDP growth, a slight rise in unemployment and a gradual deviation of inflation to the Fed’s target by 2026.

These numbers shouldn’t change much. Goldman expects a “small upward revision” to GDP and slightly downward expectations for unemployment and core PCE inflation.

There probably won’t be much to see here.

Chairman Powell will then take the stage, and what could have been a low-news event could turn into something much more interesting.

Powell has a long way to go – aware of continuing the fight until inflation is defeated while also recognizing that real interest rates, or the difference between the federal funds rate and inflation, are rising as the latter continues its gradual slowdown.

Currently, the federal funds rate is targeting between 5.25%-5.5%, 5.33% to be precise. Although Tuesday’s CPI report showed food and energy inflation at an annual rate of 4% in November, the core personal consumption expenditures inflation rate is 3.5%, putting the real rate around 1.8%.

In normal times, Fed officials view the so-called neutral rate — which is neither restrictive nor stimulative — closer to 0.5%. Hence Powell’s recent statement that interest rates are “in restricted territory.”

“We expect the FOMC leadership to consider the ongoing rapid slowdown as a reason why, at some point in 2024, it may be necessary to lower the nominal funds rate for no other reason than to maintain the same level of real restraint,” UBS economist Jonathan said. “But we don’t expect Chairman Powell to sign anything soon,” Pingel said in a note.