With inflation and economic growth accelerating this year, Federal Reserve Chair Jerome Powell and his colleagues may consider moving up a discussion on scaling back monetary stimulus and penciling in a first interest rate hike as soon as 2023.
The Federal Open Market Committee is all but certain to hold interest rates near zero at the conclusion of a two-day policy meeting Wednesday, and repeat a vow to keep buying bonds at the current $120 billion monthly pace.
The panel will release a statement and quarterly economic forecasts at 2 p.m. in Washington, and Powell will hold a press briefing 30 minutes later.
"I think what we will hear from Chair Powell is that they have sort of agreed that it will be prudent to start those conversations in coming meetings," said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. "Depending on the next couple of jobs reports, it could happen as soon as July that they start these conversations."
Upgraded Forecasts
This will be among the most watched of FOMC meetings — possibly "the most important Fed meeting in Jay Powell's career," billionaire investor Paul Tudor Jones said on CNBC, with inflation accelerating and the job market tightening.
Wall Street's initial focus will be on the FOMC's "dot plot," which graphically displays policy makers' projections of the target interest rate. Seven of 18 officials in March penciled in a 2023 rate hike, meaning that if three adjust their dots higher it would bring liftoff forward into that year.
The committee is likely to bump up its rate forecast, though it's a very close call, according to economists surveyed by Bloomberg.
The FOMC may raise its economic growth forecast for 2021 to 6.6% and its inflation outlook to 2.7%, while looking for an unemployment rate of 4.7%, which is a slower pace of improvement than seen in March.
"Investors will look first at the dot plot," said Joseph Lavorgna, Natixis chief economist for the Americas. "I would guess the dot plot becomes a little more hawkish as the committee will be looking at higher inflation and higher GDP forecasts for this year and next year. The median is likely to move up."
Powell and his colleagues have described inflation's recent surge as transitory, the result of reopening the economy in the wake of Covid-19 and supply disruptions.
The 2022 and 2023 inflation forecasts are likely to be closely watched to see if they confirm the central bank continues to view price issues as temporary.
FOMC Statement
"We expect the Federal Reserve to keep interest rates on hold and maintain its assessment of the recent inflation surge as 'transitory.' Policymakers remain committed to achieving their dual-mandate targets, with emphasis on full employment. Both interest rates and asset purchases will remain steady, even though the outlook has improved," said Tom Orlik, chief economist in an FOMC statement.
