While inflation is considered an upside risk for the projected upswing cycle, COVID-19 and its mutations are a downside risk. Analysts at Rabobank note that there is no update to the dot chart this month, so officially the median FOMC participant will still expect two increases of 25bp each in 2023. They argue that upside risks to inflation could lead to another upward shift on the dot chart. , but downside risks from a prolonged impact from COVID19 could still push the dot plot in the opposite direction.
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“The next FOMC meeting is July 27-28. The Fed’s baseline scenario is that the recent rise in inflation is temporary. However, Powell’s testimony before Congress showed that the Fed has begun to describe what it would take to switch to an alternative scenario. “
“The FOMC will continue its discussion on the reduction started in June. There will be two announcements in the remainder of the year: the decision to begin downsizing and the “advance notice” of this decision. Both are likely to have more of an impact on the market than the actual start of the downsizing. “
“The escalation cycle is still some way off. June projections showed that the average FOMC participant expects to go up twice (assuming rate increases of 25bp each) in 2023. The dot plot also shows that it would not take much to reach a first move in 2022. However, this will most likely happen towards the end of 2022. The FOMC continues to view the high inflation figures of recent months as temporary. As long as this is the case, the Fed will not have rush to After all, the new flexible average inflation targeting (FAIT) strategy adopted last year allows for temporarily exceeding the 2.0% inflation target to make up for past declines. “
“There is no dotplot update this month, so officially the median FOMC participant will still expect two increases of 25bp each in 2023. However, discussions of inflation and COVID-19 may indicate in which direction it will go. the committee is tilting as we head to the September meeting, which involves an update on the projections. Risks to the upside of inflation could lead to another upward shift in the dotted plot, but downside risks from a prolonged impact from COVID19 could still push the dotted plot in the opposite direction. “
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