Fed's dot plot signals policy rate topping 4% in 2022, peaking in 2023
In a looming battle against persistently high inflation, most of the top Federal Reserve officials expect the central bank's benchmark lending rate to top 4% by the end of 2022. From there, monetary policymakers expect further hikes in 2023 before projecting cuts in 2024 and beyond.
Those predictions came according to the central bank's so-called dot plot, a closely watched summary of expectations for the future outlined by 19 members of the Fed's Federal Open Market Committee.
For 2023, the majority of officials (12) now see the key rate reaching a level between 4.50% and 5%, while the most dovish prediction comes from one member expecting rates to top out at 3.75%-4%. In the following year, the dot plot shows a wide dispersion of rate forecasts ranging from 2.75% to 4.75%.
The Fed's June estimate, by comparison, revealed most policymakers then believed the fed funds rate will reach at least 3.25% by year-end, followed by more rate hikes in 2023 and cuts in 2024.
Looking at the real economy, the Fed has cut its economic prediction for 2022 through 2024 as it seeks to bring demand and supply back into better balance. Inflation-adjusted gross domestic product in 2023 is now anticipated to be 0.2% compared with the 1.7% predicted in June.
Looking to next year, GDP in 2023 is now forecast to be 1.2% vs. the 1.7% projected in June. For 2024, economic output is now targeted at 1.7% vs. the 1.9% estimate issued in June.
The Fed, meanwhile, targeted the 2022 unemployment rate to be 3.8%, slightly surpassing June's forecast of 3.7%. That rate is expected to rise to 4.4% in 2023 and stay there in 2024, exceeding the previous projections.
Turning to inflation, the Fed sees the PCE inflation gauge coming at 5.4% in 2022, up from the 5.2% estimate issued in June. 2023's headline inflation will then decelerate to 2.8% vs. 2.6% in June's prediction. 2024 PCE to be 2.3% vs. the 2.2% projected in June's estimate.
Along with the new projections, Federal Reserve boosted its key rate by another 75 basis points, its third hike of this size in a row.