Powell speaks as the Fed raises interest rates 0.5%: live updates

Here’s how to read the numbers released on Wednesday.

Point plot, decoded

When the central bank issues a file Summary of economic forecasts Each quarter, Fed watchers obsessively focus on one segment in particular: the so-called dot plot.

The dot plot shows the 19 federal policymakers’ estimates for interest rates at the end of 2022, along with the next several years and over the longer term. Predictions are represented by points arranged on a vertical scale.

Economists watch closely how the range of estimates changes, as it can give a hint as to where policy is headed. However, they hold very intently on the middle point (currently the 10th). This middle official, or median, is regularly quoted as having the clearest appreciation of where the central bank sees policy direction.

The Fed is trying to back off Rapid inflationAnd to do that, officials believe they need to raise interest rates enough to reduce spending, disrupt business investment and expansion, and cool a hot job market. The central bank quickly raised interest rates in 2022, and expectations for future increases have also risen.

In June, the mid-ranking official expected interest rates to close the year in the 3.25 to 3.5 percent range — instead, they will be set in the 4.25 to 4.5 percent range if policymakers raise rates as much as expected on Wednesday. The average official expected rates to rise to 4.6 percent in 2023 as of the last rate forecast in September, but that forecast is expected to rise slightly in the new version.

However, central bankers are likely to expect that they are nearing the end of the road when it comes to raising interest rates. They’ve already done a lot to calm the economy, and they don’t want to overdo it and crush growth and the job market more than is necessary.

The most important trick to read this point? Pay attention to where the numbers drop relative to the long-term average projection. This number is sometimes called the normal range, and recently it is It stood at 2.5 percent. It marks the theoretical dividing line between easy and restrictive monetary policy.

The Fed can use the gap between the federal funds rate and the so-called natural rate to indicate how far they plan to go into the constraining zone of the economy — and also how long they will stay there. How long prices will stay high is a particularly important question at this moment.

Unemployment forecasts will be key

Does the Fed expect a much higher unemployment rate as it tries to combat rapid inflation? Page 2 of the Economic Outlook contains some answers.

The Federal Reserve has two jobs. It is supposed to achieve maximum employment and stable inflation. Unemployment rates have been very low, employers are working steadily, and wages have been brisk throughout 2022, so officials believe their full employment target is more than satisfied. On the other hand, the inflation rate is about three times their official target.

Given this, central bankers are now single-mindedly focused on bringing price gains back under control. But once the job market slows, unemployment begins to rise and wage growth falters—a chain of events officials believe is necessary to return to slow, steady price gains—the tricky phase of the Fed’s maneuvering will begin. Central bankers will have to decide how much unemployment they are willing to take, and they may have to judge how to balance two conflicting goals.

Jerome H. Powell, the Fed chairman, has acknowledged at times that the adjustment process is likely to bring “pain” to businesses and households. The Fed’s updated unemployment rate projections will show how much he and his colleagues are willing to take it.

Watch growth forecasts

The road to higher unemployment rates is paved with slower growth. To force the labor market to cool off and inflation to moderate, Fed officials believe they have to drag economic growth below its potential level — and how much of a drop is expected could send a signal about how punishing the Fed thinks its policies will be.

Many experts believe that an economy is capable of achieving a certain level of growth in any given year, based on basic characteristics such as the age of its population and the productivity of its companies. Right now, the Federal Reserve estimates that a sustainable level over the long term would be about 1.8 percent, after adjusting for inflation.

Last year, the economy was growing much more aggressively than that – it was starting to overheat. This year, growth has been much weaker. The question is how far the Fed thinks it needs to be in 2023 to help policymakers meet their inflation target.

Pro tip: Interpret inflation estimates with caution

Inflation estimates in the Fed’s forecasts don’t usually provide much insight.

That’s because the Fed’s forecasts predict how the economy will shape if central bankers determine what they consider “appropriate” monetary policy. To be rated “adequate,” by definition, monetary policy must push rate increases back toward the Fed’s annual average target of 2 percent over a few years. This means that the Fed’s inflation expectations always converge towards the central bank’s target for economic estimates.

If there is a glimmer of benefit here, it is how long the central bank believes it will take to bring prices back to their target level. As of September, Fed officials believed that core inflation — the number that excludes food and fuel costs for underlying price patterns — would remain at 2.1% in 2025.

The result? It might be a long way back to normal, even in a perfect world.