By Nick Timiraos 

The Federal Reserve is prepared to raise short-term interest rates by a quarter percentage point after its two-day policy meeting concludes Wednesday, the eighth such move since late 2015. Officials will also present revised projections of future rate moves along with their outlook for inflation, employment and growth.

The central bank releases its policy statement and the forecasts -- the so-called dot plot -- at 2 p.m. EDT. Fed Chairman Jerome Powell takes media questions at 2:30 p.m. Here is a look at what to watch:

The Destination

In June, a narrow majority of officials projected the Fed would raise rates a total of four times in 2018. That group is likely to grow this week as the Fed lifts its benchmark federal-funds rate for a third time this year, to a range between 2% and 2.25%.

The bigger question is how the rate path next year has evolved and how Mr. Powell might characterize the balance of risks at the press conference.

One camp of officials says so long as unemployment keeps falling farther below the level that they project is consistent with stable prices, the Fed will need to raise rates to prevent the economy from overheating. This is an uncontroversial strategy because it is what the central bank always does at this point in an expansion.

Another camp argues for a relatively radical departure from this norm. These officials say if inflation doesn't appear to be accelerating beyond 2%, the Fed could stop raising rates after reaching a "neutral" setting designed to neither spur nor slow growth.

Mr. Powell hasn't revealed his preference, but in a speech last month he seemed sympathetic to treating the traditional models more skeptically than some of his colleagues or staff.

Fuzzying Up the Forward Guidance

Fed officials debated at their most recent meeting whether it was time to jettison language from their policy statement that for years has described rates as "accommodative," meaning they are low enough to stimulate growth.

Removing the language later, when rates are much closer to a potentially neutral level, risks sending a misleadingly precise signal about where such a setting lies. Mr. Powell has shown he is wary of suggesting the Fed has pinpoint accuracy over such estimates, which are inherently uncertain.

Still, there may be little urgency to remove the phrase now because rates are still projected to be accommodative after this week's increase. Dropping the language risks suggesting officials have little need to raise rates further. At the same time, Mr. Powell could use his press conference to clarify that this isn't the case.

The New Dots

Wednesday's dot plot will have a few new twists. Vice Chairman Richard Clarida will attend his first Fed rate-setting meeting and submit projections. John Williams will contribute projections for the first time as New York Fed president, after many years doing so as San Francisco Fed chief. While the San Francisco Fed has named Mary Daly as its new president, she takes office next week, so Mark Gould, the bank's operating chief, will represent the regional reserve bank.

The new dot plot also will be the first to present officials' projections of the economy and interest rates in 2021. To be sure, that is a long way off and the out-year projections tend to shed little new light on the policy path.

But the 2021 projections could clarify a key piece of the Fed's policy narrative: How does the central bank plan to guide the unemployment rate up to its so-called natural rate -- the level at which inflation neither slows nor accelerates? Officials in June projected this rate to be around 4.5%. U.S. unemployment was 3.9% in August.

Global Divergence

Financial turbulence abroad represents the biggest risk to the Fed's plans. Officials could hold off on future rate increases if a stronger dollar causes greater upheaval in emerging markets or trade tariffs lead to a slowdown in China that sparks global market selloffs.

Watch Mr. Powell's level of concern in the press conference keeping in mind both these potential risks and a related one -- that the Fed exacerbates this turbulence by raising rates steadily while other major central banks do not. So far, emerging-market turmoil has been limited to Argentina and Turkey, whose economies have idiosyncratic problems. But there is no law that says crises that begin in vulnerable markets stay contained to these places.

Operating Matters

Mr. Powell could face questions about two longer-term decisions that are ripe for debate. At the Fed's July 31-Aug. 1 meeting, officials agreed to take up an important technical discussion this fall around their framework for implementing monetary policy. This is an issue separate from how high or low they set rates, and it could have important ramifications for how much longer the central bank winds down its $4.2 trillion balance sheet of bonds and other assets.

Meantime, a growing minority of Fed bank presidents have said they would like the Washington-based Fed governors to increase the levels of loss-absorbing capital that large private-sector banks must raise, using a rule known as the countercyclical capital buffer. Mr. Powell hasn't expressed a strong opinion on the matter.

Write to Nick Timiraos at NickTimiraos@wsj.com

(END) Dow Jones Newswires

September 26, 2018 05:14 ET (09:14 GMT)

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