The two-day meeting of the Fed’s Open Market Committee (FOMC), which began in Washington overnight, is one of the four most crucial meetings each year. It is quarterly, bringing updated economic forecasts and, especially for markets, a new interest rate ‘dot plot.’
This ‘dot plot’ is the primary focus for markets, economists, analysts, and others when the post-meeting statement, new forecasts, and dot plot are released after 4 a.m. Sydney time on Thursday.
The dot plot is a chart showing where each of the 12 FOMC members (with an additional seven fed executives potentially contributing, totaling 19) believes interest rates will be by year-end, three consecutive years later, and the more ambiguous ‘longer run’ – essentially an educated guess.
Each dot represents an individual, anonymous view on the direction of rates. Currently, the federal funds rate ranges from 5.25% to 5.50%, and no change is expected at this meeting.
The last ‘dot plot’ from the Fed’s June meeting suggested one more rate hike from current levels and the possibility of four rate cuts by the end of 2024, with the first rate cut projected for May 2024.
The recent surge in oil and petrol prices pushed headline consumer price inflation to 3.7% in August from 3% in June.
US swaps contracts linked to Fed decisions now imply between three and possibly four rate cuts (totaling 1% or less), down from over 1.5% of cuts earlier this year.
Some economists anticipate the first cut being delayed until June 2024 and no more than three rate cuts by the end of 2024.
The June quarterly economic forecasts raised the Fed’s growth estimate for 2023 to 1% from 0.4% in the March forecast, partly due to robust economic growth, especially in retail sales (though housing remains weak) and solid business investment.
Unemployment was reduced to a forecast of 4.1% this year from 4.5% in March (3.7% in August), and Personal Consumption Expenditure inflation (PCE inflation), the Fed’s preferred measure, was trimmed to 3.2% from 3.3%. Economists expect a slight increase in the new forecasts.
Core PCE inflation, which excludes volatile prices for petrol and food, rose to 3.9% in June from 3.6% in March. Economists are curious whether this measure will increase to 4% or more, potentially triggering interest rate concerns.
Economists and others will closely examine the 2024 forecasts. In June, the Fed forecasted growth of 1.1% (down from 1.2% in March), unemployment of 4.5% (4.6% in the March forecast), PCE inflation of 2.5% (unchanged from March), and core PCE inflation of 2.6% (unchanged from March as well).
While the 2023 forecasts are important, the 2024 estimates will dominate market thinking as this year is nearing its end. Swaps, futures, options, and other positions will be adjusted based on the new forecasts and the 2024 dot plot. Some interest may also turn to estimates for 2025.
Finally, the post-meeting statement, new forecasts, and dot plot will form the basis for Fed Chair Jay Powell’s discussion during his post-meeting media conference, where his comments often reinforce the statement and data’s main points.