The Federal Reserve will release a new set of economic forecasts on Wednesday, and everyone’s eyes will be on two crucial issues. Monetary Policy: Will the governor of the U.S. central bank hint that they want to start raising interest rates? interest rate 2023 instead of 2024? How high do they expect inflation to rise this year and next year?

The Fed will provide clear answers in a form that anonymously displays the forecasts of all its officials. Driven by transparency initiated by its former chairman Ben Bernanke, it has released data for 14 years.

These forecasts may be useful signaling tools for central banks, but sometimes they confuse their information. Senior Fed officials often remind the market, the media, and the public that they should not be used as policy guidelines. This is stipulated in the official statement of the Federal Open Market Committee-but investors may find it difficult to resist.

How do these forecasts work?

Every FOMC participant, including board members and regional Fed presidents, is required to make economic forecasts four times a year, usually in March, June, September, and December. 18 people are expected to do so this week.

These are personal forecasts submitted anonymously on GDP growth, unemployment, inflation, and the Fed’s main interest rate levels. Participants submit forecasts for this year and the next two years and long-term.

These figures are then aggregated and released at the same time as the FOMC statement. For each indicator, the Fed publishes all forecasts, central trends, and the most important median forecast.

What about those points?

The Fed’s most sensitive forecast is its interest rate forecast. Although the median forecast is released along with other economic indicators, it also has its own chart, called a “dot chart”, which was launched in 2012. This shows each individual interest rate forecast as a point, which shows how to predict how much the cost of borrowing will change in the future.

During the last Fed forecast March, 11 FOMC officials expect interest rates to remain close to zero at least until the end of 2023, which indicates that monetary policy will be tightened in 2024. We will soon find out whether this is still the case, or whether some FOMC members are now looking forward to launching sooner. The latter also means that the Fed may cut its $120 billion in asset purchases earlier, which is a harbinger of any interest rate hike.

Federal Reserve Chairman Jay Powell has warned that dot plots “sometimes cause confusion” and he may fall into a win-win situation this week. If there is no change in the median interest rate forecast, the Fed may be judged as complacent in the face of high inflation.But if central bank officials do turn to raising interest rates in 2023, this may imply that the central bank is worried inflation And it may tighten up sooner.

How good are the Fed’s forecasts?

The forecasts of Fed officials usually do not differ significantly from those of other economists. After all, they are based on many of the same models. But especially during the pandemic, the central bank had to make considerable adjustments to its forecasts.

In March 2020, the Fed did not even release a series of forecasts due to the high uncertainty during the peak period of the lockdown. “John Kenneth Galbraith once said that economic forecasts exist to make astrology look respectable,” Powell quipped last year.

Its first number affected by the virus appeared in June 2020. The Fed predicts that the economy will contract by 6.5% this year. By the end of December, the core inflation rate will be 1% and the unemployment rate will fall to 9.3%. By the end of the year, the situation looks very different. , The Fed expects the economy to shrink by only 2.4%, the core inflation forecast is 1.4%, and the unemployment rate drops to 6.7%.

The problem now is that compared to March 2021, the forecast looks much better. In March 2021, the economy will grow by 6.5%, the core inflation rate at the end of the year will be 2.2%, and the unemployment rate will drop to 4.5%. It is almost certain that inflation data will see a big jump, but growth and labor market data will not increase much.

What do investors think?

Market indicators of interest rate expectations indicate that the interest rate hike is slightly earlier than the Fed’s forecast in March. A popular proxy-Eurodollar futures-indicates that the first rate hike will occur in the first half of 2023, and at least another rate hike later in the year. Given the speed of the economic recovery so far, some analysts believe that the Fed’s forecast may begin to get closer to these market indicators.

The market does seem to agree with the Fed’s view that current inflationary pressures will prove to be “temporary.”Despite rising consumer prices in the U.S. the fastest speed Since last month in 2008, the yield on the benchmark 10-year US Treasury note has fallen from the high reached in March.

This does not mean that the market will not develop in accordance with the new forecast. In fact, investors said that given the Fed’s framework for formulating monetary policy outlined last year, these forecasts may be more important signals than ever.

The central bank did not preemptively raise interest rates to avoid rising inflation, but Firm Wait until they see higher consumer prices start to rise. The forecast released on Wednesday will show how officials view this interaction.

“The narrative of monetary policy has changed,” said Pascal Blanqué, chief investment officer of Amundi. “These points must be analyzed and tracked.”

Brook Fox Graphics