The Federal Reserve is expected to respond to persistently high inflation by hiking interest rates half a point on Wednesday. That will mark its seventh and final painful hike of the year, albeit a smaller one than the last four historically high three-quarter point increases.
But the main event at December's meeting will be the Federal Reserve's highly anticipated Summary of Economic Projections and what's known colloquially as the dot plot. Investors will be paying close attention to these forecasts for clues about the path of rate hikes in the new year and beyond.
They're worried that they'll show a more aggressive monetary policy tightening path, indicating that more hikes are coming next year.
What's happening: At the end of the Federal Reserve's two-day meeting this week, the central bank will release its economic outlook. That forecast, which is updated four times a year, includes a chart which plots out an array of dots, showing where each of the Fed's 19 leaders expect interest rates to go in the future.
Former Fed chair Ben Bernanke first created the dot plot in 2012, mostly as a way to assure the public that Fed leaders planned to keep interest rates low for the time being. Now the opposite is true, the dots have become a signal that interest rates will remain elevated into the future — spooking investors and Fed watchers alike.
The problem is that it's difficult to predict what the future actually holds. As economic data changes, so do Fed projections.
Federal Reserve Chair Jerome Powell warned last year that "the dots are not a great forecaster of future rate moves," and that they should be taken "with a big, big grain of salt." But that doesn't stop investors from reading into them.
Dot-plot madness: The dot-plot release could take a bite out of market sentiment this week, even as investors cheer an easing of rate hikes.
"We think the markets are too sanguine on rates after the first quarter and we expect Powell to take a more hawkish tone and for the dots to indicate higher rates for a longer period of time than what is currently being priced in by the futures markets," wrote Cliff Hodge, chief investment officer for Cornerstone Wealth in a recent note. "A 'hawkish' step-down so to say."
The question is how big of a jump will there be in the dots. Back in December 2021, the Fed was only expecting rates to finish this year at about 0.9%.
In a note on Monday, Goldman Sachs analysts said they expect the median "dot" to rise to a new peak in Federal fund rates of 5% to 5.25%, up from 4.5%-4.75% in September. That would mean Fed officials expect to raise rates by half a percent more than they did three months ago, when the plot was last released.
What else: Wednesday will also bring the Fed's latest forecasts for the unemployment rate and gross domestic product (GDP) growth. Those numbers will highlight whether Fed officials think recession is likely and how high their tolerance for pain is as they continue the fight to bring down persistent inflation.
Economists at EY-Parthenon believe that projections for real GDP growth will likely be revised down from 1.2% in the fourth quarter of 2023 to around 0%. Unemployment rate projections, they say, will likely approach 5% (from 4.4% in the September update).
The Federal Reserve announces its rate hike decision Wednesday at 2 p.m., followed by a press conference with Powell at 2:30 p.m.
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