Dot Plot: About "Longer", Not Necessarily "Higher"

There will be two focal points to the September Dot Plot update – the end-2022 rate forecast (which will form clear expectations of what to expect at the next two meetings), and the 2023 "terminal" rate. MNI's expectations are below.

• We expect the 2022 median to be 4.1% (sell-side consensus of 3.9% / June 3.4% / market rate pricing 4.22%), with 2023 also 4.1% (sell-side split between 4.1% and 4.4% / June 3.8% / market 4.1%).
• A sub-4% 2022 dot is expected by almost half the sell-side, but we think that would be a dovish surprise given that it would mean the median participant sees under 100bp in hikes at the next two meetings.
• Most analysts expect the FOMC to eye further hikes in 2023, and the risks clearly lie toward a 4.4% median vs our 4.1%.
• But we think the median participant at this point will be minded to front-load large hikes to get well above the longer-run rate and see how things develop next year - as opposed to slow down immediately and get in a couple of 25bp increases in Feb / Mar.
• Additionally, recent messaging has been much more about Powell's "maintaining a restrictive policy stance for some time" and not "prematurely loosening". That points to lower 2023 peak, but a median at/close to 4% in 2024.
• The 2025 dots, which are new in this projection and which will be interpreted as convergence to the longer-run dot (which nobody expects to change from the 2.5% currently), will likely be largely disregarded as a strong signal.

Source: MNI