MNI PREVIEW: Fed 2023 SEP Forecast in Focus, Guidance Delayed

The Fed will publish forecasts stretching into 2023 for the first time Wednesday, the closest policy makers may get to offering clues on more stimulus as they debate stronger forward guidance to cope with a lingering pandemic.

Fed watchers will pay attention to any changes to the Fed's July statement that the economy and employment "picked up somewhat in recent months but remained well below their levels at the beginning of the year." Since then officials have stressed the need for better adherence to Covid-19 guidelines, the benefits of a longer fiscal bridge and signs that inflation and job gains slowed in recent weeks.

MNI has reported exclusively that officials are reluctant to deliver new forward guidance in September because they are just starting the process of debating its exact form after concluding an 18-month review of its policy framework. Some market participants still see guidance as early as this meeting.

The Summary of Economic Projections constitutes a form of guidance because they include officials' projections for the path of interest rates. Investors will be looking for any signs that some members might be penciling in rate increases in late 2022 or 2023. Only two members saw a 2022 rate hike and several market watchers say that kind of result could be shown for 2023 as well.

PRESS CONFERENCE CLUES

Fed Chair Jerome Powell's press conference may be the bigger focus for questions about the future path of policy, and perhaps about whether recent dollar weakness affects the Fed outlook. The ECB and other central banks are watching dollar weakness as they seek to restore their own economies, though with less outright complaints about devaluation than 2008-09.

Powell will also likely get pressed on what more the Fed can do to boost the economy in the absence of fiscal stimulus from Congress that appears increasingly unlikely with just a few weeks left before the presidential election.

In response to the pandemic, the Fed cut official interest rates to around zero, swelled the balance sheet to USD7 trillion and launched emergency facilities including corporate and municipal bonds as well as smaller "Main Street" loans.

The programs have seen minimal uptake and reporters will likely ask Powell whether any modifications to the programs, which are backed with USD460 billion in loss-absorbing capital from Treasury, could make them more useful. Lawmakers have been asking the same questions.

BOND BUYING

The response depends on whether weakness from Covid-19 hits financial markets or the real economy, pressuring the Fed to ramp up emergency lending or opt for more aggressive forward guidance and bond buys.

Ex-officials say the Fed could also soon lengthen the maturities of bonds where its purchases are concentrated to keep long-run interest rates down.

Powell will also emphasize the new long-run framework launched at last month's Jackson Hole conference, including flexibility through an average inflation target and greater focus on getting to full employment. While some Fed officials say the inflation overshoot could be something around 2.5% or less, investors want more detail on how long and how large the overshoot could be.