What’s the next step in the Fed’s fight against inflation?

The Federal Reserve, the U.S. central bank, is expected to announce a third consecutive interest rate hike on Wednesday, as it wages its most aggressive fight against inflation since the 1980s — and that may indicate that further increases will come.

The institution is expected to increase the interest rate by 0.75 percentage point. Investors think there is even a small chance of a 1 percentage point rise.

But Wall Street is more focused on what’s next. Officials will release updated economic forecasts for the first time since June, following this week’s two-day meeting.

The question is how much more assertive the American Central Bank will be.

The Fed has already raised interest rates considerably in an attempt to slow the economy and moderate price increases. Business activity is slowing in response, but it’s not plummeting: employers continue to hire, wages are rising, and inflation has remained stubbornly fast.

This has led officials to reinforce in speeches that they are serious about controlling price increases, even if it comes at a cost to growth and the job market. It’s an inflation-focused tone that many on Wall Street call “hawkish.”

Economic projections can give policymakers a chance to reinforce that commitment.

“Things are not turning out as they expected — they are having trouble slowing the economy,” said Gennadiy Goldberg, US rate strategist at TD Securities. “At the end of the day, there’s very little they can do this week, but they sound aggressive.”

Jerome Powell, chairman of the Fed, will give an interview to journalists after the release and will likely repeat his pledge from late last month to do whatever it takes to bring prices down.

It can be a painful process, acknowledged Powell. Higher interest rates moderate inflation, making it more expensive to borrow money, discouraging both consumption and business expansion. This weighs on wage growth and could even increase unemployment. Companies can’t charge as much in a slowing economy, and inflation cools.

“We will continue until we have confidence that the job has been done,” said Powell.

If the Fed continues to raise rates along the path economists and investors expect, the consequences could be painful.

In the early 1980s, the last time inflation was as high as it is today, the central bank under Paul Volcker raised borrowing costs dramatically and mired the economy in a recession that drove unemployment to double-digit levels.

Builders sent Volcker blueprints for buildings they couldn’t build; car dealers sent keys to cars they couldn’t sell.

Interest rate hikes this year are not that severe. The Fed raised rates from near zero in March to a range of 2.25% to 2.5%, and this week’s expected move would take them to 3% to 3.25%. If the Fed raises rates as much as investors expect in the coming months, they will end the year well above 4%. In the 1980s, rates jumped from 9% to around 19%.

Still, a full 4 percentage points of rate hikes over 10 months would be the quickest monetary policy adjustment since the Volcker campaign — and while Fed policymakers hoped they could slow the economy smoothly without causing a painful recession, economists have warned that a benign outcome is increasingly less likely.

The Fed has two economic targets: maximum employment and steady inflation at around 2%. While unemployment is very low, prices are rising more than three times the target rate based on the measure used by the Fed and remained stubbornly fast and broad in August.

As inflation persisted month after month, the Fed repeatedly increased its response. It raised rates by 0.25 point in March, 0.50 point in May and 0.75 point in each of its last two meetings. Like investors, many economists think a 1-point increase is possible, but not likely, this week.

A big reason to raise rates quickly is to convince businesses and consumers that the central bank is committed to holding off rapid price increases. If workers begin to believe that inflation will last, they can push for higher wages to cover their costs, which employers pass on to customers in the form of higher prices, setting off an upward spiral.

The Fed recently received good news on this front: inflation expectations are decreasing. That could be one reason the central bank will opt for a 0.75 percentage point move rather than a larger adjustment at this meeting, said Michael Feroli, chief US economist at JP Morgan.

“It’s not about managing psychology — it’s about slowing down economic activity, which can be done at a more methodical pace,” he said.

So Wall Street is likely to be especially in tune with the Fed’s interest rate forecasts for the remainder of 2022 and beyond.

These projections are often referred to as the “dot plot” because the release shows the anonymous forecasts of individual policymakers arranged as blue dots on a graph. Officials predicted in June that they would raise interest rates to 3.4% this year – a figure they have almost reached, suggesting the forecast should be revised upwards.

They also projected that they would raise interest rates to 3.8% next year before lowering them again. As inflation persisted, economists came to expect the peak rate to rise further.

The new level will send a signal about how tightly the central bank plans to contain the economy. Fed officials want to adjust policy vigorously enough to control inflation, but without overdoing its rate moves and inflicting more pain on the economy than necessary.

Finding the right balance can be difficult. Fed policy takes time to spread through the economy. While rate hikes have already started to weigh on the housing market and overall growth is starting to slow, the full impact of recent central bank measures could take time to be felt.

“The faster the Fed raises rates, the less likely a soft landing is,” Goldberg said, because officials are not waiting to see how their measures unfold. “It’s a lot like realizing you missed your highway exit a mile ago.”

Given that risk and how much rates have already moved this year, many economists expect the Fed may soon want to slow the increases.

Goldberg expects another 0.75 point move in November, then a pullback to a 0.50 move in December. Goldman Sachs economists wrote in a note this week that they expect the Fed to raise interest rates by 0.5 percentage point at each of the next two meetings after Wednesday’s, so the federal funds rate ends the year in a range. of 4%-4.25%.

Authorities have repeatedly signaled that even after they slow and eventually halt rate hikes, they plan to keep borrowing costs at a high and economic constraint level for some time.

“Monetary policy will need to be tight for some time to give confidence that inflation is falling to target,” Lael Brainard, vice chairman of the Fed, said in a recent speech.