Here’s everything the Fed is expected to do at its meeting this week

On Mar 14, 2022

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, D.C., U.S., on Wednesday, March 2, 2022.

Stefani Reynolds | AFP | Getty Images

The Federal Reserve this week faces the monumental challenge of starting to undo its massive economic help at a time when conditions are far from ideal.

In the midst of a geopolitical crisis in Ukraine, an economy that is off to a slow start and a stock market in a state of tumult, the Fed is widely expected to start raising interest rates following the conclusion Wednesday of its two-day meeting.

Those three elements pose a dauting challenge, but it’s soaring inflation that the Fed will focus on most when its meeting starts Tuesday.

“The economic outlook supports the Fed’s current plans to boost the federal funds rate in March and to begin to reduce their balance sheet over the summer,” wrote David Kelly, chief global strategist for JPMorgan Funds. “However, there [are] a number of areas of uncertainty which should make them a little more cautious in tightening.”

The Federal Open Market Committee meeting will be focusing on more than a solitary interest rate hike, however. There also will be adjustments to the economic outlook, projections for the future path of rates, and likely a discussion about when the central bank can start reducing its bond portfolio holdings.

Here’s a look at how each will play out, according to the prevailing views on Wall Street:

Interest rates

Markets have no doubt the Fed will enact an increase of a quarter-percentage point, or 25 basis points, at this meeting. Because the central bank generally doesn’t like to surprise markets, that’s almost certainly what will happen.

Where the committee goes from there, however, is hard to tell. Members will update their projections through the “dot plot” — in which each official plots one dot on a grid to show where they think rates will go this year, the following two years and the longer range.

“The ’25’ is a given. What matters most is what comes after,” said Simona Mocuta, chief economist at State Street Global Advisors. “A lot can happen between now and the end of the year. The uncertainty is super high. The trade-offs have worsened considerably.”

Current pricing indicates the equivalent of seven total increases this year — or one at each meeting — a pace Mocuta thinks is too aggressive. However, traders are split evenly over whether the FOMC will hike by 25 or 50 basis points in May should inflation — currently at its highest level since the early 1980s — continue to push higher. A basis point is equal to 0.01%.

From a market perspective, the key assessment will be whether the hike is “dovish” — indicative of a cautious path ahead — or “hawkish,” in which officials signal they are determined to keep raising rates to fight inflation even if there are some adverse effects on growth.

“We think the message around the rate hike has to be at least somewhat hawkish. The real…