Market participants widely expect the Federal Reserve to raise interest rates at the conclusion today’s FOMC meeting. The only real debate surrounding this meeting regards the Fed’s messaging. Central bankers pivoted to a more hawkish stance in recent weeks, and this shift will be reflected in the statement and accompanying Summary of Economic Projections. But will it be modestly or very hawkish, or somewhere in-between?

Federal Reserve Chairman Jerome Powell’s debut post-FOMC press conference should provide guidance on this issue.With that in mind, these are the questions I am hoping he will answer the following questions either directly or indirectly:

1. How does “avoiding overheating” compare to “sustaining full employment”? In his most recent Congressional testimony, Powell shifted the language regarding the Fed’s policy objective to “avoiding overheating.” Does this mean the Fed’s focus is now on restricting the pace of growth more forcefully?
2. What is the Fed’s level of confidence in the estimates of the longer-run level of unemployment? The unemployment rate is projected to sit well below the longer-run non-inflationary rate for a protracted period of time. Their willingness to tolerate this situation suggests they are not very confident in this estimate and are willing to allow the unemployment rate to fall even further than the currently forecasted low of 3.9 percent.
3. Even if they are not very confident of the exact level of longer-run unemployment, is there a red line they fear to cross? In his Congressional appearance, Powell said the natural rate of unemployment may be as low as 3.5 percent. That is a level not seen for five decades and then seemed to trigger high inflation. Would they be willing to flirt with that level again? Or an even lower number?
4. Is the Fed willing to invert the yield curve? The yield curve resumed flattening in recent weeks, taking the spread between 10 and 2 year securities to 55 basis points. The Fed’s forecasts indicate the Fed intends to raise rates beyond the longer-run neutral policy rates, suggesting they intend to flatten the curve further. Would central bankers deliberately invert the yield curve – or continuing hiking after an inversion – given that in the past such behavior has preceded recessions?
5. How much of any increase in the rate hike projections is directly attributable to fiscal stimulus? Fiscal stimulus is one of the tailwinds supporting US growth this year and next. Given the economy was already projected to operate beyond the Fed’s estimates of full employment, the fiscal stimulus will only exacerbate the risk of overheating. How much is the Fed leaning against fiscal stimulus?
6. What is the definition of “gradual” rate hikes? Suppose the Fed raises the rate projections to a full four hikes this year and three next. Is that still gradual? What if central bankers revise up rate projections again in June?
7. Is the Fed looking to replace inflation worries with financial instability concerns? Federal Reserve Governor Lael Brainard recently said that in the last two cycles, overheating became evident not as price inflation but instead as financial instability. Does this mean that Fed intends to pivot to financial stability concerns to justify rate hikes if inflation continues to remain low? What financial stability objective is the analogue of the inflation target?
8. How lopsided are the balance of risks to the outlook? Brainard described the current economic situation as the mirror image of 2015-16. The Fed sharply decelerated the actual pace of increases then relative to expectations. Should we be prepared for the opposite, a sharp acceleration?

Bottom Line:  Why do the answers to these question matter? Right now, the economy is in a “sweet spot” with enough upward pressure to support ongoing improvement in labor markets yet not so much that inflation is a concern. Sustained activity in this territory will deepen and broaden the benefits of this expansion to a greater share of the population. Moreover, by moving gradually the Fed has been able to extend the life of this expansion. Indeed, the odds favor that this expansion will be record breaking in length. When the Fed turns hawkish and steps up the pace of rate increases, however, is when we need to be increasingly concerned that, like all good things, this expansion will come to an end.