It's been about four months since Federal Reserve officials set about dramatically reshaping monetary policy expectations for 2022. That hard pivot feels like a lifetime ago. Since the Fed's December meeting, elevated inflation has broadened and accelerated. The labor market is even stronger than initially thought and has continued to rapidly improve. The Omicron wave came and went. And Russia invaded Ukraine, roiling financial markets and sending energy and commodity prices soaring. The direction of policy hasn't changed — Fed Chair Jay Powell made clear that the central bank will raise rates by a quarter percentage point this week for the first time since 2018. But there's huge uncertainty around what happens next, as Powell told lawmakers this month. "We will proceed, but we will proceed carefully, as we learn more about the implications of the Ukraine war for the economy," he said at a March 2 House Financial Services hearing. "We're going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment." Some key questions for this week's Federal Open Market Committee meeting: What say the dots? Policymakers will submit their economic forecasts this week for the first time since December. Those projections are likely to show big revisions for this year, including higher expected inflation, faster rate increases and weaker growth. Though the outlook is murky, the magnitude of the changes included in the Fed's Summary of Economic Projections and its dot plot will send important signals about how worried officials are about the effects of an oil price shock on inflation and growth, and how aggressively they're prepared to move to tamp down price pressures. In December, officials' median projection for their benchmark federal funds rate was 0.9 percent, implying three rate increases this year. Futures markets now expect that forecast to double. What happens after 2022? A key question is how high officials raise rates next year and beyond, and whether they expect to push the fed funds rate beyond what they see as a "neutral" policy stance — i.e. neither supporting or restricting economic growth. A cautionary reminder from former Fed Governor Larry Meyer, in a Friday note: "The dots tell us what level the funds rate is projected to reach at the end of each year. That tells us something, but not everything, about the pace. In particular, it doesn't tell us how many moves are expected, when in the year they are expected to be, and how big each of them is." Go big or go home? Remember the frenzied speculation that officials could raise rates by a half percentage point in March, given the torrid pace of price increases? The invasion of Ukraine, and heightened geopolitical risks that came with it, scuttled any prospects of that move. But Powell didn't foreclose on the possibility when he testified earlier this month, suggesting officials could pursue a bigger move at a future "meeting or meetings." Fed Governor Lael Brainard, who is effectively acting now as Powell's No. 2, has said she favors a handful of small increases as the central bank begins lifting rates. "She's not alone in that view, but a handful of other voters have expressed more openness to delivering at least one 50bp increment, particularly in the first half of the year while inflation is at its highest levels," Morgan Stanley economists said in a note. "We see the evolution of inflation and financial conditions as the main players in the Fed's meeting by meeting deliberations." We'll be listening for any more hints from Powell about the potential for a super-sized rate increase in the coming months. What happens with the Fed's balance sheet? Powell has said the Fed will continue deliberating about what to do with its nearly $9 trillion asset portfolio but won't announce any final decisions at the March meeting. Officials could announce some details around that normalization process, including where they may set the monthly caps for balance sheet runoff. Many economists now expect that process to begin in May or June, starting sooner and proceeding faster than the last time officials shrunk the balance sheet. Either way, expect Powell to be quizzed about how officials see the balance sheet runoff helping to rein in inflation, and what size they see as optimal over the longer term. IT'S MONDAY — We hope you took our advice on Friday. It's going to be another big week on the economic data front. We want to know, what would you ask Powell at his press conference Wednesday? Send your Powell questions, plus tips, story ideas and feedback, to kdavidson@politico.com, aweaver@politico.com, or find us on Twitter @katedavidson or @aubreeeweaver.
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