Expectations for what the Fed will do at its next meeting have been on a bit of a rollercoaster. This has created some fluctuations in the dollar, as well as the stock market. But now that Fed officials are sitting down for the two-day policy rate decision, it seems like economists are finally coming to some kind of agreement on what to expect tomorrow.
Four fifths of surveyed economists expect a 75bps hike, with the remainder still holding on for 100bps. That's a consolidation of agreement compared to just a week ago, when over a quarter of analysts were predicting a full percentage point hike. Part of that is due to actually digesting the CPI figures that came out last week.
Why not 100bps?
Last week's inflation figures were a bucket of cold water on the markets, as headline inflation was above expectations and core inflation continued to rise. Both pushed in the direction of the Fed keeping its aggressive hiking stance.
But, the thing is, the Fed hasn't met since July, so expectations for what the Fed will do this time have to take into consideration the last two inflation reports. And July CPI figures were substantially better than the August ones. Taking into consideration all the data that has been released since the last FOMC meeting, there is still a bias towards aggressive hiking, but not so much as the last data indicates.
Getting expectations in order
In fact, one of the reasons that there was such a strong reaction to the CPI data was that it came as a surprise. July data was implying a possibility for the Fed to start moderating the pace of hikes. Prior to the release, the consensus was for 75bps, and dissenters were arguing for 50bps.
The latest guidance from the Fed is that rates will be determined on a meeting-by-meeting basis based on the data. Which means now the focus is on whether the Fed will start giving hints for longer-term policy outlook. If the Fed does a "triple" rate hike, the third in a row, the very next question traders will be asking is, what's next?
Tracing lines into the future
Several Fed officials have said that interest rates are getting near "neutral", which is the point at which the Fed presumably will start moderating its aggressive hiking. It's estimated that it is around 3.5%. Another 75bps would not only push the rate above where it was in 2018, but up to 3.25%. If the Fed were to continue hiking for the rest of the year (there are two meetings left), then it might be in 25bps increments so as not to substantially go above the "neutral" rate.
Therefore, there will be a lot of focus on the dot-plot matrix, which is the summary of where FOMC officials expect rates to be in the future. Up until now, rates were expected to remain high for at least the first quarter of next year. A change in those expectations could determine where the market goes after the FOMC meeting.