The Federal Reserve is expected on Wednesday to lift interest rates by three-quarters of a percentage point for a third straight time and signal how much further and how fast borrowing costs may need to rise to tame a potentially corrosive outbreak of inflation.
The policy decision, due to be announced at 2 p.m. EDT (1800 GMT), will mark the latest move in a synchronized policy shift by global central banks that is testing the resilience of the world's economy and the ability of countries to manage exchange rate shocks as the value of the dollar soars.
While investors largely expect the Fed to lift its policy rate by 75 basis points to the 3.00%-3.25% range, markets could be unsettled by the updated quarterly economic projections that will be released along with the policy statement.
Those projections will show where Fed policymakers think interest rates are heading, how long it will take inflation to fall, and how much "pain" is likely to be inflicted on U.S. employment and economic growth along the way.
If the past few months are any prologue, that rewritten economic script will point to a tougher-than-expected fight ahead, with a federal funds rate that may top 4% by the end of 2022, versus the 3.4% that was expected when the last set of projections were issued in June, and rising unemployment.
"With little evidence in hand that inflation pressures are abating, (Chair Jerome Powell) is likely to re-emphasize the Fed's commitment to do what is necessary to bring inflation to target, even if that means risking a recession," Deutsche Bank economists wrote late last week. "They will ... foresee tighter monetary policy and greater pain in the labor market."
Deutsche Bank expects the U.S. central bank to eventually need to raise its policy rate to around 5.00%, a level approaching the peak of 5.25% seen from mid-2006 to 2007 when Fed policymakers were concerned about a bubble in the U.S. housing market, and one that could amplify stress across the global financial system.
Powell is scheduled to hold a news conference at 2:30 p.m. to elaborate on the latest policy decision, and his tone will shape whether it is interpreted as a hawkish next step with more of the same ahead, or as a final bit of rate-hike "front-loading" before the Fed reverts to more conventional rate increases of 50 or 25 basis points as it feel its way to a stopping point.
Powell has had to correct himself in real time about the Fed's likely path twice this year. In June, after he largely ruled out hiking rates by three-quarters of a percentage point, a surprise jump in inflation unnerved the policymaking Federal Open Market Committee and pushed its members towards the larger increase. In July, Powell's comment that the Fed might move to smaller incremental rate increases was read as indicating an imminent policy pivot.
