What to know this week
Jerome Powell and the Federal Reserve will take center stage in the week ahead when the central bank makes its next policy decision.
The Fed is scheduled to meet on Sept. 19 and 20 followed by a press conference with Fed Chair Powell at 2:30 p.m. ET on Wednesday. Investors expect the FOMC will hold interest rates steady in a benchmark range of 5.25% to 5.5% to see if inflation continues to cool.
Markets were choppy last week, ending the five-day period mixed after rising energy prices drove surprises in economic data, but didn't significantly change investor bets on interest rates remaining steady. Midway through September, a traditionally tough month for markets, the tech-heavy Nasdaq (^IXIC) slid 2.3%. The benchmark S&P 500 (^GSPC) is down 1.2% while the Dow Jones Industrial Average (^DJI) has fallen 0.3%.
When it paused interest rate hikes in July for the first time in 10 meetings, Powell indicated the Fed would remain data-dependent. He highlighted several data releases the central bank had eyes on for further insight on the labor market and inflation's cooldown.
The data since has shown easing core inflation and a cooling labor market, both outcomes the Fed wants. So the question surrounding the central bank's meeting is less about what the Fed does in September and more about the policy decisions that come after that.
"With inflation continuing to run above target and the labor market cooling off only gradually, we expect the Committee to signal further policy tightening is possible if incoming data warrant it," Wells Fargo's team of economists wrote in a research note on Friday. "This message is likely to be delivered through both the post-meeting statement and Chair's press conference."
With the Fed's interest rate decision on Wednesday mainly priced in by markets, Bank of America's Michael Gapen says the release will be all "about the SEP." The Summary of Economic Projections (SEP) includes Fed officials' forecasts for inflation, economic growth, and a "dot plot" mapping out expectations for future interest rates that will also be released on Wednesday.
The last dot plot, released in June, showed policymakers project an additional rate hike in 2023. Investors will closely watch if that projection for a fed funds rate peaking at 5.6% this year will be moved down, indicating the Fed is done hiking interest rates for the year. Additionally, given the stronger-than-expected economic data over the month of August, investors will be looking out for when the dot plot projects rate cuts.
"We expect the 2023 median policy rate forecast to show one more 25bp hike, for a terminal rate of 5.5-5.75%," Gapen wrote. "Perhaps the most important forecast is the 2024 median, which in our view will shift up by 25bp to 4.875%, reflecting just 75bp of cuts next year. This would be about 40bp above current market pricing. Risks are skewed toward an even larger upshift in the 2024 median, which would be a significantly hawkish outcome.
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