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Fed projects six to seven rate hikes by end of 2024

Yahoo Finance’s Brian Cheung breaks down the Fed’s decisions from its September FOMC meeting.

Video transcript

ALEXIS CHRISTOFOROUS: It's decision day for the Federal Reserve. Welcome, everyone. I'm Alexis Christoforous joined by my co-host, Adam Shapiro. And stocks are staging a comeback rally as they wait to hear from the Federal Reserve.

All three major indexes near their best levels of the day, up about 1%. And, Adam, you have to wonder if the market is getting a little ahead of itself. Will investors really hear what they want to hear from the Fed in terms of them mapping out a timeline for when they're going to roll back those asset purchases?

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ADAM SHAPIRO: That's the key question we're going to find out in roughly 45 seconds, Alexis. But the thing to keep in mind, too, is that a lot of analysts will tell you that rolling back the asset purchases doesn't have as big an impact on these markets as raising interest rates. And we're going to get the dotplot to tell us when they're going to start raising interest rates. The betting money is not until late-2022.

ALEXIS CHRISTOFOROUS: Yeah, those dotplot projections are going to be making a comeback. They haven't been at the last couple of meetings, so we're going to get some more insight there. And also, lots of market strategists believe that the tone today is going to be a little bit more hawkish. Do you think we might see that, Adam?

ADAM SHAPIRO: Absolutely. Loretta Mester out of Cleveland said this just a few days ago-- I'd be very comfortable with starting to reduce asset purchases this year. And you hear this not just from Mester, who will be a voting member of the FOMC next year, but several others.

ALEXIS CHRISTOFOROUS: All right, want to get to our Fed Correspondent Brian Cheung with the Fed announcement. Brian.

BRIAN CHEUNG: Well, Alexis, the Federal Reserve holding interest rates steady at near-zero, but an update on their approach to tapering, again, their so-called quantitative easing program where they've been buying about $120 billion a month in assets. The update is that the committee said, quote, "if progress continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted."

That is an update which could tee up for the possibility of an announcement of an actual taper maybe in the November or December meetings. Those are the only two FOMC meetings remaining in the calendar year 2021. Of course, Alexis, all eyes are on the Fed's dotplot. This is a projection of where policymakers could see interest rates going over the next few years.

And when you take a look at the dotplot, very interesting to see the range of where these 18 policymakers could see interest rates going over the next few years. In fact, it's a little bit difficult to count here, but the median member of the FOMC-- so if you're looking at the ninth or the 10th member of the FOMC-- sees no interest rate hikes through the end of 2022, although the split was really 9 and 9. So you can say that it was really quite even between 9 members of the FOMC seeing at least one rate hike by the end of next year, but the other half of the committee seeing no interest rate hikes by the end of next year.

But consider when you take a look at 2023, the year after that, the expectation is for at least three rate hikes in 2023. Again, there's a big kind of dispersion there. Actually, the line is going three to four total rate hikes for 2023 across that 18-member committee. And then when you look even a year after that to 2024, the median FOMC member sees six to seven total rate hikes.

Again, the Fed chairman had said in the last time that they got an updated summary of economic projections that you should take these projections with a grain of salt. It's difficult to know what's going to happen to the US economy in six months, let alone in 3 and 1/2 years. So it'll be interesting to see how the Fed chairman addresses that in his press conference.

As far as the language in the statement itself, not too much changed. The big change in the second paragraph of the statement did acknowledge that the rise in COVID-19 cases, quote, "has slowed their recovery," referring to sectors that have been most adversely affected by the pandemic-- those more service-focused sectors. Again, I already highlighted the language with regards to the tapering.

But beyond that, the Federal Reserve continuing to say that inflation largely reflects transitory factors, although they did tweak the language to say that inflation does appear to be elevated. On the other economic projections, the Federal Reserve actually lowering its expectations for GDP growth in 2022. They originally saw 7% growth this year, but they now lowered that to 5.9%, but they did upgrade their expectation for growth in 2022 from 3.3% to 3.8%. So it seems like they're just pushing back a little bit where that growth might be coming.

On inflation, the expectation is for hotter inflation this year. They now project PCE headline to be 4.2% this year. It was previously 3.4% in June. But they do expect to get inflation to be transitory falling back to 2.2% on headline PCE in the year after that. Keep in mind, the Fed's inflation target is 2%. And the last thing that I'll mention here, obviously, employment-- the Fed revising up its expectation for the headline unemployment rate to be 4.8% by the end of this year, that is compared to 4.5% in June-- so maybe the Fed not as optimistic about the pace of the labor market recovery, but we'll see what type of color the Fed Chairman Jerome Powell has to add to this when he approaches the podium in about 27 minutes, Alexis.

ALEXIS CHRISTOFOROUS: Yeah, that's when the fireworks could probably start. I was curious about inflation and whether or not they were going to change that word, transitory. Seems like they're not. But I'm wondering, do you think-- I would have to imagine the answer is, yes-- that Powell is going to have to speak to what's going down in China with regard to Evergrande and how he sees that, perhaps, as a threat to us here on our shores.

BRIAN CHEUNG: Yeah, well, no acknowledgment of that particular downside risk in the Fed statement, at least. But of course, it is likely, especially given just the volatility that we saw in markets earlier this week, that he might be asked about it in the press conference. But it seems like because of the nature of the story, which is still developing, we don't know how the CCP is going to address the situation, to what degree they might come in to save the financial woes that the company is facing.

But we do know that the Fed chairman has looked at other types of foreign risks before. He might say the same boilerplate statement, which is the Federal Reserve is going to monitor that situation. But that hasn't necessarily changed the way that the Federal Reserve is thinking about its accommodation to the economy right now.

Everything that we've heard from the Federal Reserve with regards to tapering is pretty much the same in this statement, given what we've heard from the Federal Reserve back in Jackson Hole at the end of August, which was before the Evergrande situation. At the time, the Federal Reserve was saying if the economy progresses as planned, It's possible that the taper could happen this year. This statement appears to be right in line with that economic kind of guidance that the Fed chairman provided about three weeks ago. So it seems like the Evergrande, if it were to come up in the press conference today, likely to be nodded to but not necessarily to read into by the Fed chairman.

ALEXIS CHRISTOFOROUS: All right, Brian Cheung, thanks for breaking down those Fed headlines for us.