The Federal Reserve, after chasing inflation for the better part of a year, will look ahead as far as 2025 in new projections this week that will show more fully the depth and length of the economic “pain” its policymakers expect to be needed to stop the current surge in prices.
The tale so far is not a pretty one. The pace of price increases, which by the Fed’s preferred measure are running at more than three times its 2% target, have hardly budged in the face of the most rapid set of U.S. interest rate increases in about 30 years.
The projections, due to be published alongside the Fed’s latest policy statement at 2 p.m. EDT (1800 GMT) on Wednesday, will show just how aggressively U.S. central bank officials feel interest rates must rise to respond to the inflationary wave, and what economic cracks they see appearing as a result in terms of slower growth or higher unemployment.
Hopes for a “soft landing,” marked by a slowdown in inflation toward the 2% target without a recession, may not be gone: Policymakers are unlikely to project an outright downturn even as the outlooks compiled each September extend an additional year, in this case through 2025.
Outside the Fed, however, there is a growing sense that the path to a soft landing is unlikely. Some analysts estimate the unemployment rate, which hit 3.7% in August, may need to rise as high as 7.5%.
Traders in contracts tied to the Fed’s benchmark overnight interest rate now expect that rate to end the year between 4.25% and 4.50% - 2 percentage points higher than where it is now and a level last seen in late 2007.
“The probability of a softish landing falls materially” after U.S. inflation data for August showed just how persistent rising prices have become, Evercore ISI Vice Chairman Krishna Guha wrote last week. “Even assuming...it is still possible to bring inflation down...without a proper recession, the data and the response it will provoke substantially increases the risk that the Fed ends up overshooting badly and causing a recession anyway,” with the policy rate perhaps hitting as high as 5.00%.
AN END IN SIGHT?
The updated economic projections will give the clearest indication yet of Fed policymakers’ sense of the endpoint for rates, key information for investors trying to value assets or homebuyers wondering what a mortgage might cost next year.
Some officials have lately shied away from discussing the issue in detail, wary of setting expectations and then having to shift gears. The new projections, though, will include anonymous estimates from each official for where the policy rate should be at the end of 2022 and the following three years. The so-called “dot plot” of estimates from the seven members of the Fed’s Board of Governors and 12 regional bank presidents also includes outlooks for unemployment, inflation, and economic growth.
As long as inflation continues to move sideways rather than downwards, however, they face a dilemma over whether to raise interest rates to levels even higher than currently foreseen or hope the increases already flagged will eventually do the job.