Fed is widely expected to lift federal funds rate by 25bps to 2.00-2.25% today, without a doubt. The voting will be a point to note to seen how impatient the doves were. But it’s more likely to be unanimous than not at this stage. Also, there are expectations of a slight change in the language. That is, “the stance of monetary policy remains accommodative” could be changed to “somewhat accommodative” or even dropped. But this won’t trigger much market reactions, changed or not.
The major focuses will be on the new economic projections. Firstly, 2021 figures will be released. Based on June’s projections, medium projected appropriate federal funds rate will be at 3.4% by the end of 2020. We’d be eager to know if Fed policy makers expect to stop there through 2021, or they would lean towards more tightening ahead. (Btw, at 3.4% which is above 2.9% projected longer run rate, that’s tightening. Now, it’s just accommodation removal, totally different stage.)
Secondly, while all the figures, inflation, growth, unemployment, policy path matter, we believe the key is on the 2.9% estimated longer run rate. From the communications of Fed officials, the general consensus is for Fed to raise interest rate to “neutral” and see how it goes from there. A raise in the estimated longer run rate will be tied to a perceived higher neutral rate. And that would be, Fed’s rate hike cycle would likely be prolonged further. To us, this is the single most important figure that moves markets.
Here are some suggested readings on FOMC:
