With Federal Reserve officials all but guaranteed to hold interest rates steady today, Wall Street’s attention will be laser-focused instead on whether Chair Jerome Powell and his colleagues are getting more pessimistic about the outlook for inflation. The central bank’s quarterly economic projections, which will be updated this afternoon, show Fed policymakers’ thinking about where rates should be at the end of the year — the dot plot — and how the economy would look as a result of that policy. In December, they penciled in three rate cuts for 2024, but inflation since then has proved stubborn, coming in hotter than expected, which could make Fed officials lean toward keeping borrowing costs higher for longer. “There are meaningful risks the dots drift higher and only show two cuts” for this year, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities, though he added that markets wouldn’t be shocked by that. “The extent of the move in the underlying dots and how Powell messages the move will be key,” he said. “If it is a wholesale rethink of the monetary policy path and Powell leans into the move, suggesting they have reduced their confidence inflation is on the right track — there could well be a big market impact.” Investors have generally adjusted to the idea that there might be less of a drop in borrowing costs than they previously thought; JPMorgan economists initially projected five cuts for 2024 and are now only expecting three – one every other meeting starting in June. That’s relatively consistent with what others are pricing in, according to CME’s FedWatch tool. According to JPM, it’s even possible that the Fed’s projection of where rates settle over the longer run could move up noticeably from 2.5 percent, where it has sat for a long while. The Minneapolis Fed noted in a paper last month that some of the individual central bank policymakers’ projections for this longer-run rate skewed noticeably higher in December. “The dispersion in these projections suggests a great deal of uncertainty around the level of interest rates in the long run,” according to that paper. “After all, the United States and economies around the world are still recovering from the disruptions of the pandemic and the war. For instance, the implications of changes in working arrangements—such as a more common adoption of work-from-home practices—and reconfigurations of global value chains to increase production resilience have yet to fully play out.” All of this means that borrowers who are getting most squeezed by higher rates – from lower-income Americans with credit card debt to commercial real estate mortgage holders – could continue to feel the pinch for a while. Julia Pollak, chief economist at ZipRecruiter, said less vulnerable sectors should be fairly insulated because “so few have adjustable rate debt and so many locked in low rates early in the pandemic.” But Randall Kroszner, who served on the Fed board from 2006 to 2009, told MM that he still expects some pain from rates to hit the economy, with unemployment “moving up into the fours.” The U.S. might still avoid recession, he said, but argued that markets may be too optimistic in how they see this all playing out. “They seem to take a soft landing as awfully soft,” he said. It’s Wednesday — Send tips to zwarmbrodt@politico.com.
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