The market will be dissecting the details from the Fed
With the FOMC not expecting to change policy today, the market participants will be focused on the details including the nuances of the dot plot and central tendencies.
Back in June (see the plot above), the dot plot showed that seven Fed officials expected a rate rise in 2022, while eleven saw no change. Of the seven looking for a change in policy, five saw a 25 basis point rise while two saw a 50 basis point rise.
In 2023, thirteen Fed officials saw rate rises while five saw no change in policy. The most hawkish (two officials) saw the fed target moving to 1.5%-1.75% from the current target of 0.0% to 0.25% (a 150 basis point rise). The least hawkish showed 2 members who saw only a 25 basis point rise. Nine officials saw a rise of 50 to 100 basis points.
The expectations are that the skew will be to the upside for the dot plot.
Looking at the central tendencies, in June, the projections for PCE inflation in 2021 rose substantially from 2.2% – 2.4% in March to 3.1% - 3.5% in June. I would expect that inflation expectations would move higher marginally. For 2022, the inflation rate was projected at 1.9% – 2.3%. Will the Fed be as confident about inflation moving back toward the 2% level in 2022 or will they project a rate above the 2% Fed target?
The unemployment rate stayed state fairly steady in 2021 and 2023 versus the March projections. It might be that that also stays steady going forward (or with little change).
In GDP growth in 2021 will likely move lower than the 6.8 – 7.3% projection seen in June. Does that lead to stronger growth in 2022?
Below are the central tendencies from the June FOMC meeting.
