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Why Economic Predictions Made By The Fed Aren’t Always Predictions 

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The Federal Reserve will release new economic predictions with its policy decision on Wednesday, giving investors its best bet as to where economic growth, inflation, unemployment, and interest rates will fall in the upcoming years.

Fed Increased Intrest Rates

Investors are probably going to pay the closest attention to this final section of the forecast for to main reasons, even though the CME’s Fed-Watch tool indicates that there is a 99% chance that rates will remain unchanged.

The first is that the Federal Reserve indicated in June that two additional rate hikes would be required through the end of 2023 in its so-called “dot plot” of interest rate forecast. The Fed has already increased rates once.

In addition, with the Fed projected to hold steady on Wednesday, the central bank will have to decide between changing its forecast or raising rates in either November or December for the remainder of the year.

The market’s response on Wednesday will probably be largely influenced by the Fed’s decision regarding this issue.The second is that investors like challenging the outlook provided by the Fed.

What the Fed refers to as its “projections of the most likely outcomes” for the economy are frequently presented as immovable predictions before being used to demonstrate that the central bank has no idea.

Aggressively Marketing Rates

Of course, the Federal Reserve is made to be criticised as it is a branch of the government and is made up of appointed individuals as opposed to elected ones. Financial markets are among the few locations where you may find a more substantial, data-driven series of arguments and criticisms.

Fed

Source- CNBC

But the market has regularly gambled against the Fed and done it in the same manner over the years. In essence, the market believes that the Fed will eventually quit doing what it is now doing. Investors wager that rates will cease falling or climbing sooner than they actually do, respectively, whether they are falling or rising.

The latter trend is more prevalent in today’s Fed discussion. The Capital Economics team explained its viewpoint that the Fed will need to be more aggressive in easing policy next year than is currently priced in by markets and predicted by the dot plot in a client letter back in August.

According to Andrew Hunter, the company’s deputy chief US economist, “we continue to expect the Fed’s next move to be a rate cut in early 2024, with a rapid decline in inflation convincing officials to cut more aggressively than markets are pricing in.”

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