A 75 basis point rate hike is a done deal. What else is there to watch out for at this week’s Federal Reserve meeting?

The expected interest rate dot plot released by the Federal Reserve this week is more important than ever. It is a real roadmap for monetary tightening. The Fed is expected to raise its unemployment rate forecast, which may exceed 5% next year. Powell may take a tough stance, which is roughly the same as the central bank's annual meeting at the end of last month.

A 75 basis point rate hike by the Federal Reserve this week looks set to be a done deal, with most market participants expecting this to be the third consecutive such hike.

Wall Street Journal noted that as of the close of U.S. stocks on Tuesday, Eastern Time, the Chicago Mercantile Exchange (CME)'s "Federal Reserve Watch Tool" showed that the U.S. federal funds rate futures trading market expected that the probability of the Federal Reserve announcing a 75 basis point rate hike after the meeting on Wednesday was as high as 84%, and the probability of a 100 basis point rate hike was only 14%.

CME tools show that the interest rate futures market expects the Federal Reserve to announce a 75 basis point rate hike on Wednesday with an 84% chance.

Since a 75 basis point rate hike is already expected, what else is there to watch at this week’s Federal Reserve meeting?

According to the planned schedule, the Fed will only release the latest economic data outlook of Fed policymakers and the dot plot representing their respective expectations for interest rate levels in the next few years after four meetings at the end of the quarter in March, June, September and December this year. Therefore, the main focus of this week's meeting is on the economic outlook and the dot plot.

The dot plot is more important than ever before. The real roadmap for monetary tightening may have surprises in the economic outlook.

The economic outlook update after the last meeting in June this year showed that Federal Reserve officials across the board lowered their expected economic growth rates for this year, next year and the next three years, raised their unemployment rate expectations for the next three years, and raised their expectations for this year's personal consumption expenditures price index (PCE) and core PCE inflation.

Some media believe that the dot plot released after this week's meeting is more important than before, because investors have tried to bet on how the dot plot will hint at the pace of future interest rate hikes and how much impact Federal Reserve officials expect interest rate hikes may have on the economy.

Moreover, any surprises could appear in the Fed's economic outlook for inflation, unemployment and GDP growth expectations. Some economists expect that the Fed's current round of rate hikes will be more restrictive on the economy and may have a more severe impact on the economy.

KPMG chief economist Diane Swonk believes that this is the first real roadmap for monetary tightening. From the Fed's perspective, they are entering a world of tightening.

“This is really entering the realm of restrictive monetary policy, and we’re going into no man’s land. We haven’t really had to tighten policy to fight inflation since the early 1980s. Their goal is a long-term slowdown, so that inflation comes down slowly and unemployment only rises gradually. Whether they can get there is another question.”

Jim Caron, head of global fixed income macro strategy at Morgan Stanley Investment Management, believes that by increasing the risk of recession, the risk of inflation can be reduced because it reduces demand within the economy at the expense of slower economic growth in the future.

Be prepared for the Fed to raise its unemployment rate forecast to near 4.5% and above 5% next year

The media pointed out that after another 75 basis points of interest rate hike, the Fed's policy rate will rise to the highest level before the 2008 financial crisis. The next phase of monetary tightening will bring greater risks, which may be reflected in the updated economic outlook released this week. These economic forecasts will show how severe the "pain" that Fed officials have been warning about recently is, such as how high the unemployment rate will rise.

U.S. inflation growth has barely eased since the last economic outlook was released in June, prompting Fed policymakers to take a more aggressive monetary stance. It has also made them increasingly skeptical of past estimates of the relationship between unemployment and inflation, which may be why they are now inclined to target a larger slowdown in economic activity.

Deutsche Bank recently predicted that the unemployment rate will peak at 4.5% when the Fed reports this week, which would be significantly higher than the June economic outlook, when the Fed projected unemployment rates of 3.7%, 3.9% and 4.1% this year, next year and the next three years, respectively.

The non-farm payrolls report released earlier this month showed that the U.S. unemployment rate was 3.7% in August, the highest since February and the first month-on-month increase in seven months. Assuming that the total labor force remains unchanged, a rise in the unemployment rate to 4.5% means an increase of approximately 1.3 million unemployed people.

Brett Ryan, senior U.S. economist at Deutsche Bank in New York, said he expects the Fed to continue to sell the scenario of a soft landing in the future, but will signal a high risk of recession.

Bloomberg economists Anna Wong, Andrew Husby and Eliza Winger believe that the overall theme of the Fed's economic forecast will be to prepare for higher unemployment because more rate hikes are needed before inflation can be controlled, and interest rates that have a restrictive impact on the economy will remain at a level for a longer period of time. The current market pricing reflects an expected terminal federal funds rate of 4.4%, which Fed policymakers may consider to be reasonable pricing.

KPMG chief economist Diane Swonk believes the Fed may expect the unemployment rate to exceed 5% by the end of next year.

Media comments said that since before the outbreak of the COVID-19 pandemic, the median unemployment rate forecast of Fed officials has remained stable at around 4%. If this forecast is raised, it will mean a significant change in the views of the Federal Reserve's Monetary Policy Committee (FOMC). Fed officials may expect the unemployment rate to rise higher, which will be consistent with stable inflation at a low level during the long-term forecast period.

Powell may make a tough statement similar to the central bank's annual meeting at the end of last month.

At the Jackson Hole Global Central Bank Annual Meeting held at the end of last month, Federal Reserve Chairman Powell's brief speech directly extinguished the market's hope of turning dovish, scaring the U.S. stock market. He stressed that "interest rate hikes must be insisted on until the mission is accomplished", bluntly stated that "historical records have strongly warned against premature easing of policies", and believed that it may be necessary to keep interest rates at a restrictive level for some time.

In his speech, Powell directly poured cold water on the market's expectations that the Fed would start cutting interest rates in the second half of next year, saying that Fed officials in June had expected the median federal funds rate to be slightly below 4% by the end of next year.

On the 8th of this month, in his last public statement before the silent period of the Federal Reserve meeting this week , Powell reiterated that he would continue to raise interest rates until inflation is successfully fought. He also reiterated that history warns us not to relax policies too early, and firmly stated that "we need to act directly and forcefully now."

Powell will hold a press conference after the Federal Reserve’s interest rate meeting this week.

Rick Rieder, chief investment officer of global fixed income at BlackRock, commented: "I think he (Powell) has put up a bulletin board behind him that says 'inflation must come down'. I think he will speak hawkishly."

Michael Gapen, chief U.S. economist at Bank of America, expects that the message from Powell's press conference will be largely the same as that from the Jackson Hole central bank annual meeting, which will still be about keeping monetary policy restrictive and for a period of time, with the overall goal of price stability.

Jim Caron, head of global fixed income macro strategy at Morgan Stanley Investment Management, believes that Powell's remarks may inadvertently appear dovish because the Fed already has a very hawkish tendency.

"I think a third consecutive 75 basis point (rate hike) is pretty hawkish, and they (the Fed) don't have to try very hard to be hawkish in the market."