This week the Fed will release a new statement, Summary of Economic Projections (SEP), and dot plot. Friday’s data reports brought plenty of bad news for the Fed and were consistent with our expectations that the upcoming Fed meeting is going to be a hawkish one.
We expect significant upgrades to the interest rate projections and for Chair Powell to sound much more serious about doing whatever it takes to fight inflation than he did at the May meeting. Our baseline is that the Fed delivers 50 bps this week and will try to set up an option for 75 bps in July, but if the market prices in a higher risk of 75 bps over the next few days, we think this will give the Fed an opportunity to be more aggressive on Wednesday.
We expect Chair Powell to use the press conference to signal larger hikes are back on the table and that they are not slowing down in September. Looking ahead, stickier inflation is resulting in an even more aggressive front loading of Fed policy which creates serious risk of overtightening, and ultimately greater downside risk to our already stall-speed growth outlook.