While indicating that interest rates will ultimately rise more than anticipated, the Federal Reserve is prepared to scale back its hawkish tightening on Wednesday.

Convincing markets that this isn’t a dovish swing and that authorities won’t prematurely halt their campaign against Inflation, which is currently running three times greater than their 2% target, will be Chair Jerome Powell’s challenge.

There is a general expectation that the Federal Open Market Committee will increase rates by 50 basis points, bringing its benchmark goal rate to a range of 4.25% to 4.5%, the highest since 2007. Fresh quarterly economic forecasts made public after the meeting will also provide insight into how far policymakers expect interest rates to rise.

After Powell stated that they would need to raise rates more than anticipated, economists polled by Bloomberg predicted that the median estimate would peak at 4.9%. That suggests that the FOMC will reduce its policy movements in February and March to 25 basis points before pausing them. Current pricing in interest-rate futures markets indicates that investors share this viewpoint.

The verdict and the predictions will be made public in Washington at 2:00 pm. Thirty minutes later, Powell will address the media.

Officials will find it easier to shift to a lesser rate rise this week due to consumer pricing data issued on Tuesday, which suggests that the worst of the US inflation may have passed. Powell, however, might take advantage of his news conference to reassure the public that policymakers won’t back down until it is evident that inflation is on a path to return to 2%.

All eyes will be on the dot plot, the conference, and what Fed Chair Powell has to say about the future course of interest rates, according to Lydia Boussour, senior economist for EY Parthenon. She referred to the quarterly projections for rates shown as a chart of anonymous dots through 2025 and beyond.

Potential Rate Path

Fed officials predicted that rates would reach 4.6% by the end of the next year at their September meeting. However, according to officials, these expectations have recently increased due to economic data suggesting that, despite inflation lowering, it is still persistently high.

Officials claim that the labor market is still out of balance because there is a greater demand for workers than available workers, and the pay rise continues.

The forecasts will shed light on the policymakers’ most recent expectations for the direction of interest rates. Michael Pugliese, an economist at Wells Fargo & Co., said that the Fed chairman is unlikely to commit to a particular course of action because he prefers to keep his options open. He believes they’ll maintain flexibility, he remarked.

Criteria for pausing

How soon officials anticipate pausing the rate rises could be deduced from the rate estimates. Tim Duy, the chief U.S. economist for SGH Macro Advisors, said that a more prominent peak might indicate that rate increases could continue well into next year. In contrast, a more modest increase in the terminal rate might suggest that officials could cease raising rates as soon as March.

But he said that Powell’s explanation of how policymakers would determine when to stop raising interest rates or if they should continue doing so would be crucial.

They have been inching toward what Duy believes to be a terminal rate, around 5%. What circumstances may support that?

“Ongoing” Increases

In the FOMC statement, one important term to look for is if policymakers continue to believe that “ongoing increases in the target range will be appropriate” to raise rates to a sufficiently restrained level to lower inflation.

As per Roberto Perli and Benson Durham of Piper Sandler & Co., dropping the phrase “ongoing” could send a dovish message and imply that the Fed would likely stop raising rates in March, earlier than anticipated.

According to Derek Tang, an economist with LH Meyer, the Fed members may decide to preserve the phrase “ongoing rises” in the statement for the remainder of the hiking cycle to avoid conveying a message that may ease financial conditions.

To keep “ongoing increases” until the first meeting without a raise, Tang stated in an email, “There’s little cost to them to do so.”

Painful Economy

The forecasts will also show what authorities anticipate for the US economy regarding expansion, the unemployment rate, and inflation. According to James Knightley, chief international economist for ING, predictions that show authorities now anticipate it would take more time for inflation to decline to their target could help to support their higher interest-rate projections.

According to Boussour of EY Parthenon, policymakers may lower their expectations for the upcoming year, forecasting lower economic growth closer to zero and an increase in the unemployment rate to 5% from the present rate of 3.7%.

According to her, the perception emerging from the revised projections will be that the Fed is willing to tolerate some additional economic suffering to restore price stability.

Soft Landing Probabilities

Even if officials propose a base case that avoids a recession, the trajectory of those indicators can reveal how officials think about the dangers of a recession, according to Pugliese.

According to Knightley, Powell might use the news conference to convey to the public that policymakers still feel there is a chance to achieve a “soft landing,” in which they manage to lower inflation while easing household suffering.

He predicted that a recession might be a possibility, but it’s not the Fed’s base case, adding that the Fed would state as much.

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