A fresh set of estimates from Federal Reserve officials is expected to be released next week. These forecasts are anticipated to reflect the Fed’s increased confidence in the possibilities for an economic soft-landing.

They’ll probably keep the option of one more rate increase on the table.

Not that the majority of economists firmly believe they will follow through.

“A lot of it is signaling, and risk management,” says Deutsche Bank economist Matthew Luzzetti.

The main uncertainty is how policymakers rearrange their old estimates from three months ago now that the majority of the financial and economics world has come to the conclusion that the U.S. central bank will leave short-term interest rates in the current range of 5.25%-5.50% at the conclusion of its meeting on September 19-20.

Since their June 13–14 meeting, economic indicators have consistently shocked policymakers to the upside, necessitating the revision of outlooks that predicted stagnant growth, much higher unemployment, and only mild increases in inflation.

Given that situation, Luzzetti predicts that Fed policymakers won’t raise the policy rate any higher, in line with the majority of economists surveyed by Reuters. They simply aren’t ready to express it yet.

“If they declare the cycle done from a tightening perspective, that would likely lead to a significant easing of financial conditions – which I don’t think they want to deliver,” he said.

Higher stock prices or lower bond yields, for example, might encourage borrowing and spending, which would lead to more of the inflation the Fed is attempting to prevent.

Additionally, Luzzetti notes that although if it is not the most likely scenario at the moment, inflation growth could stagnate as the year goes on, necessitating a rate increase to quell rebounding pricing pressures.

“It’s critical, I think, for them to maintain flexibility, and optionality,” Luzzetti said.

According to Luzzetti and numerous other experts, this suggests that the majority of Fed decision-makers will likely continue to pencil in a year-end policy rate of 5.6%, which is one quarter point higher than the current rate.

Tim Duy of SGH Macro Advisors is one of the few economists who thinks the economy will ultimately compel the Fed to increase interest rates later this year, even if several Fed policymakers themselves view that forecast as more of “cheap insurance” than a likely conclusion.

As opposed to the four rate decreases predicted in the Fed’s June report of economic prospects, Duy anticipates policymakers will signal that rates will remain higher for longer.

Numerous other economists anticipate that the Fed will indicate fewer rate decreases in the next year.

Rates are currently expected to drop to 4.4% by the end of 2024 and 3.8% by the end of 2025, according to financial markets.

The Fed’s seven governors and the presidents of its twelve banks will discuss their projections next week as part of their policy discussions, and they will be made public after their two-day meeting concludes on Wednesday.

It seems obvious that policymakers’ GDP predictions for this year will receive a significant upgrade, according to Duy, Luzzetti, and other analysts. Although interest rates have increased by 525 percentage points over the past 18 months, the U.S. economy expanded at a rate of roughly 2% in the first six months of this year and may be expanding even faster now.

Even taking into consideration potential drawbacks like the delayed impact of interest rate increases on consumer spending, slower growth in China, or any effects of U.S. automakers’ strike action on the economy, June’s prediction of 1% growth this year seems way too pessimistic.

According to experts, Fed policymakers may potentially use the predictions to show more optimism about the labour market. In August, the unemployment rate spiked to 3.8%, its highest level since before the Fed started raising rates. However, the main factor was an increase in job seekers rather than employment losses, which, for the time being at least, is a sign of strength rather than weakness.

Furthermore, economists believe that authorities will forecast lower inflation this year than they did in June.

The personal consumption expenditures price index, which measures inflation, reached a peak of 7% last summer before dropping sharply this year to 3.3% in July.

That is only somewhat higher than the 3.2% rate that the Fed had predicted for the year’s end.

However, as many economists predict, if the Fed’s 2% goal is not reached next year, there may be fewer interest rate reductions. The Fed’s June predictions predicted inflation would reach 2.1% by the end of 2025, and this month’s projections will include a snapshot for the first time for 2026.

According to Cleveland Fed President Loretta Mester, she aims to implement policy in a way that the Fed’s 2% inflation target is attained by the end of 2025. She may have to postpone any rate reductions as a result.

“Inflation calls the tune here,” says Nationwide’s Kathy Bostjancic.

(Adapted from Reuters.com)

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