Fed prepares to update interest rates as inflation picks up

The Federal Reserve has spent much of the year trying to moderate inflation. This week it will look at the new projections through 2025. They will take a closer look at the economic difficulties, their duration and the strength of their impact.

The pace of interest rate increases this year is the fastest in three decades. Nevertheless, it has not reduced the rate of price growth, which is more than three times the Fed's preferred target of 2%.

The Fed's forecasts and latest policy statement are due out Wednesday at 2:00 p.m. EST (6:00 p.m. GMT). They will be used to get the opinion of U.S. central bank officials on how fast interest rates should rise in order to fight back against a wave of inflation, as well as what economic cracks will appear due to slowing economic growth or rising unemployment.

But there are still hopes for a "soft landing" - slowing inflation to the 2% target without a recession. Policymakers are unlikely to forecast a clear recession, even when the forecasts made every September are extended for another year.

Outside the Fed, however, there is a widespread point that a "soft landing" is unlikely. Some analysts estimate that the unemployment rate, which reached 3.7% in August, could rise to 7.5%.

Traders who trade contracts tied to the Fed's benchmark overnight interest rate now expect that rate to be between 4.25% and 4.50% by the end of the year. That is 2 percentage points higher than the current rate. The last time it reached this level was at the end of 2007. 

Krishna Guha, vice chairman of Evercore ISI, wrote last week that the likelihood of a smooth decline in inflation without a subsequent recession is greatly reduced. He drew such conclusions after the release of U.S. inflation data for August, where a steady rise in prices was clearly visible. The Vice President believes that even if the Fed manages to reduce inflation without triggering a recession, the data and the reaction it will cause significantly increases the risk that the Fed will end up going way overboard and triggering a recession anyway.