“Market pricing for aggressive Fed action has accelerated, and we believe policy makers are likely to lean into it,” said Robert Dent, a Nomura Securities economist. The Fed is concerned by “upside risk to the inflation-generating process. Markets have now provided the Fed with an opportunity to move more swiftly.”
While Powell has pledged to be “nimble,” a 75 basis-point move would be a striking change in how the chair guides markets. The FOMC gave investors several months of notice before stopping its purchases of Treasuries and mortgage-backed securities and raising interest rates from zero in March.
“Chair Powell just hates surprising markets,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. While 75 basis points seems likely, “there is a higher chance than currently in markets that they stay on their original plan.”
Dot Plot
The median dot of their rate projections could rise to around 3% for year’s end, or 2 percentage points higher than the current rate. In March, officials estimated their policy rate would end 2022 around 1.9%.
That said, Fed leaders prepare their dot forecasts in conjunction with research teams well in advance, so there’s a risk the dots may not reflect the latest urgency over inflation.
While Powell has said his goal is a “softish landing” of low inflation and a still-robust labor market, the FOMC forecasts could also give insight into how comfortable the committee would be with some boost in unemployment to help cool off the economy and inflation. The projections could show the jobless rate rising in 2023 and 2024 from a 3.5% forecast for this year.
There have been some signs of slowing growth, already. US retail sales fell in May for the first time in five months, restrained by a plunge in vehicle purchases and other big-ticket items, Commerce Department figures showed Wednesday. Excluding vehicles, sales rose 0.5% last month. The figures aren’t adjusted for inflation.
“Right now, they sound like inflation, inflation, inflation,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management. “What we’re going to try to read in between the lines is whether they truly believe or not that a recession is what’s needed to calm inflation. The code for recession is whether they see unemployment going up in 2023 or not. That would be a very bad message.”
The tone of Powell’s press conference emphasizing Fed commitment to controlling inflation will be especially important ahead of his June 22 and 23 semi-annual testimony before Congress.
Lawmakers are critical of high prices, which have become a top concern of Americans, hurting the standing of President Joe Biden’s Democrats with voters ahead of November congressional elections.
“He will be pretty somber,” said Reinhart. “You are going to have a relatively hawkish message to convey. He’s got to wear the black suit and dark tie.”
This article was provided by Bloomberg News.