Here everything the Federal Reserve expects to do

Jerome Powell, Chairman of the US Federal Reserve.

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The Federal Reserve will close its two-day meeting on Wednesday with a heavy air of uncertainty as the central bank makes progress in its efforts to curb inflation and stabilize the troubled banking sector.

At the moment, those two goals appear to be at odds: bringing inflation down requires the same higher interest rates that hit banks at the crisis level.

Still, after much volatility, markets seem to have united around the expectation that the rate-setting Federal Open Market Committee will approve an increase of 0.25 percentage point, or 25 basis points.

But that is not the only thing policymakers will have to deal with.

They’re also poised to update interest rates and economic projections, and Fed Chairman Jerome Powell will then have to explain it all at his post-meeting press conference.

Here’s a quick look at everything likely to happen.

The rate call

If the Fed goes ahead and raises its benchmark fund rate by a quarter point, that will take it to a target range of 4.75%-5%, the highest since late 2007.

Until recent events in the banking sector, the rate hike was considered a good idea. Comments Powell two weeks ago even led markets to think the Fed might go half a point. The banking tumult has switched to no-hike vs. a quarter point.

“Everything has changed,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies and a frequent Fed critic. “What I think they should do and what I think they’ll announce is the same thing, which is a very soft 25 basis point increase.”

Markets agree: As of Wednesday morning, traders were assigning a greater than 90% chance of a quarter-point move, according to CME Group tracking.

The Statement and the Powell Press

Put the two together, as markets will go through both the post-meeting statement and Powell’s meeting with reporters afterward for any clues about the Fed’s future path.

A key sentence to focus on in the statement will be: “The Committee expects continued increases in the target range to be appropriate to conduct monetary policy sufficiently restrictive to reduce inflation over time up to 2 percent.”

Variations of that phrase have appeared in FOMC statements since the rate hike cycle began in March 2022, but this time could be changed to suggest a less certain outlook.

Aside from that, Powell will be looked to for assurances that the Fed is not on a pre-set walking course and is well aligned with the dangers the banking crisis poses to policy.

The chairman will say “we are very aware of the financial problems and we are also concerned about inflation,” said Sri-Kumar. “That’s why we’re walking 25 basis points. But we’re going to depend on data. We’re not going to go up too much if it’s going to cause financial problems to get back.”

The dot plot

Every three months, FOMC members fill out their individual rate forecasts. Before the banking crisis, investors largely expected the Fed to raise its estimate for peak or closing interest rates above its December forecast of 5.1%.

That too has changed, and markets could be unpleasantly surprised by Fed officials’ determination to fight inflation, even in an ominous banking environment.

Goldman Sachs is something of an outlier as it expects the Fed not to raise on Wednesday. But it is still seeking increases of three quarter points in subsequent meetings.

“There is no point in tightening monetary policy amid ongoing stress in the banking system that could pose significant downside risk to the economy,” Goldman economist David Mericle said in a note to clients Monday.

Goldman sees the projection of the final interest rate rise to 5.375%.

Similarly, Citigroup thinks the markets are overly optimistic about where the Fed will go from here.

Along with pricing in a rate hike at this meeting, markets are signaling that the tightening will soon be followed by at least a few rate cuts before the end of the year to cope with a slowing economy. According to the CME tracker, the pricing indicates a funds rate to range between 4.25% and 4.5%.

“Markets are significantly underestimating the likelihood of policy rates going up and then staying at higher levels for longer, in our view,” Citi economist Andrew Hollenhorst wrote Tuesday. “Policymakers are not dropping everything to aggressively cut interest rates as risks to financial stability mount.”

Hollenhorst cited several crises in recent history in which the Fed shut down or cut spending, only to flip back and go for a walk soon after, with the 2008 financial crisis being a notable exception.

Economic projections

The Fed will also update its outlook for unemployment, inflation and gross domestic product.

Economists largely expect some adjustments.

Goldman expects those revisions to reflect “slightly higher GDP growth in 2023, a lower unemployment rate in 2023 and minor upward revisions to inflation rates.”

The inflation forecasts can be interesting. Recent data shows that prices and wages remain stubbornly above what the Fed is comfortable with.

Research agency Morning Consult reports this on Tuesday the indices point to inflation persisting around the same growth rate in March as in February, an indicator that rate hikes by the Fed are not having the desired effect.

“Despite continuously elevated inflation rates, recent instability in the financial system could force the Federal Reserve to pause or delay potential rate hikes, adding uncertainty about the trajectory of future prices,” the company said.