By Lindsay (NYSE:) Dunsmuir

(Reuters) – U.S. Federal Reserve officials will lay bare how soon and how often they think the economy will need interest rates rises over the next three years when they release new forecasts at their policy meeting on Wednesday, with investors on alert for a faster pace of tightening.

Quarterly, the so-called “dotplot” shows policymakers’ projections for growth, inflation and employment. It also includes information about when interest rates will rise.

This will reveal whether many are still sticking with their previously expressed opinions that the Delta coronavirus will not have any lasting effect on recovery, despite all the uncertainty and turbulence it has causing. The first-ever set of dots will also include the forecasts by policymakers for 2024.

With interest rates nearing zero since the COVID-19 epidemic, the Fed pledges not to increase borrowing costs after the recovery of the economy. This new Fed framework means that the Fed will place more importance on maximum employment, in addition to its 2 percent average inflation target.

Even with recent moderateration, inflation is higher than expected. This could test the Fed’s commitment to this new framework. It may cause the Fed to shift the median forecast of interest rate increases to 2022 instead of 2023 as it did at their June meeting.

Only three policymakers are required to present their projections in order for that to occur. A shift of only two could lead to a split within the Fed about whether liftoff will be possible next year.

Roberto Perli is an economist at Cornerstone Macro who was a former Fed staffer. “We know that promises and commitments aren’t made, but we still have to believe the market will decide what the policy will be.” There are upside risks.

It is becoming more likely that the central bank will use the Sept. 21-22 meeting of its board to indicate it intends to reduce its huge bond purchases. The massive bonds, which were established in 2020 to aid the recovery of the economy, are expected to be reduced in November, if the incoming data supports this. This follows the greatest economic recovery from last year’s recession.

Officials at the Fed claim that the asset purchase program is no longer useful because demand has recovered, the most direct beneficiary, even though there has been a constrained supply.

This could mean that the Fed can reduce interest rates to near zero by mid-2022.

Reuters economists have reached a consensus that rates will remain close to zero for 2023, but nearly one-quarter of the respondents to the September survey predicted that the Fed would raise rates in 2019.

As investors analyze the rate of interest rises after liftoff, it will be important to pay attention to 2024 if the Fed maintains its 2022 and 2023 median rates projections. This will show which policymakers still expect interest rates to remain on hold at least until 2024. Five of 18 policymakers expected rates to remain unchanged until 2023, according to June’s report.

Futures on the federal fund rate track short-term expectations and are currently pricing in one hike in 2023, one to two more increases in 2024. However, the Fed’s most recent Primary Dealer Survey, which it consults before every meeting, suggests three rate hikes.

Capital Economics economist Michael Pierce said that if the Fed plans to increase rates by three or more times this week, it would be a strong signal and could offset any tapering talk.

MIXED BAG ON FORECASTS

The extent to which policymakers alter their other economic forecasts could also provide valuable insight. While few expect the Fed’s expectation to raise interest rates to 2.5% (currently at 2.5%), their projections for U.S. growth and inflation could be revised.

The current quarter’s gross domestic product estimate has been lowered by economists. This is due to weaker motor vehicle sales and an increase in COVID-19 infection caused by the Delta version of the coronavirus. However, data from last Thursday revealed that U.S. retail sales increased unexpectedly in August.

It is possible that inflation estimates will prove even more complicated. Jerome Powell, Fed Chair, is still waiting for word from Joe Biden on whether he will renominate to his position for a second term. Powell has held firm to the belief that inflation higher than expected is temporary. However, he, and others, have conceded it might linger longer this year because of persistent supply constraints.

Labor Department data from August showed the underlying consumer price increases were at an all-time low of 6.6% in August. It suggested that inflation may have peaked.

Others Fed officials were more concerned. Many have mentioned the possibility of higher inflation and a rise inflation expectations to justify tapering asset purchases quickly in order to permit faster rate increases if needed.

Powell may not repeat his likely statement that tapering isn’t connected with rate hike decision at the press conference after the meeting if the median projections indicate a higher rate hike in 2023.

Tim Duy is an economist with SGH Macro Advisors. He also teaches economics at the University of Oregon. Duy said that the Board “has drifted toward the hawkish orientation.” The dots should show that the majority of policymakers think raising interest rates by 2022, in light of rising inflationary pressures. “The doves now seem limited.”