This week, the FOMC will hike 25bp and a few more Fed officials should signal their comfort with four rates hikes for this year in the dot plot. The Fed is expected to note that risks should remain balanced, with Chair Powell potentially de-emphasizing some of the downside risks – and certainly the mounting trade war tensions -that have preoccupied markets of late.

Notably, the Fed’s Summary of Economic Projections (SEP) will for the first time contain 2021 economic and policy projections for the first time (although it is unlikely that the Fed will indicate a recession is coming). According to TD, while the 2021 economic forecasts may be closer to their longer-run values, the 2021 dots need not be, as it may take a period of mildly restrictive policy to push the economy back to its long-run equilibrium.

That said, projections that suggest Fed officials have become more cautious about the future, perhaps due to a belief that fiscal stimulus is more front-loaded than previously thought, or downside risks have become more salient, would be dovish. While some market commentary suggests this may occur, recent Fed speeches do not suggest such a shift is likely

Also of note, there will be a change in the FOMC participants, namely the addition of Vice Chair Clarida, the replacement of New York Fed President Dudley with the projections from the First Vice President at the San Francisco Fed (as Williams moved from SF to NY), which could add some volatility to the projections at this meeting, although TD Securities does not expect any of these changes to deviate too sharply from the consensus on the FOMC.

As always the market will be most focused on the dot plot. Importantly, economic forecasts barely change between end-2018 and end-2020 in the June SEP, yet the median number of hikes is four during this two-year period. That, to TD’s Priya Misra, “reflects the widespread belief on the Committee that policy needs to return to neutral, and even potentially move somewhat higher as growth remains above potential, unemployment below NAIRU, and inflation above target in 2020.” However, contrary to the prevailing dovish take post-Jackson Hole, TD expects most of the 2019 and 2020 dots to suggest a tendency toward modestly outright restrictive policy relative to the longer-run dots.