Will they actually get them?
Photo by Louis Droege on Unsplash
After consecutive 0.75% rate increases, the market became optimistic the subsequent rate increase would only be 0.50%. This idea has since been squashed.
The market is currently pricing in another 0.75% increase in interest rates occurring after the Federal Reserve’s September meeting.
While the Fed is targeting higher rates, history shows they may not actually achieve what they think is optimal for the economy.
Where the Federal Reserve Stands
Interest rates are a crucial part of the economy. The benchmark rates set by the Fed impact all of us— ranging from investments such as stocks and bonds to borrowing costs, inflation, and possible recessions.
At the Jackson Hole Symposium, Federal Reserve Chairman Jerome Powell insisted interest rates remain high for an extended time. But Powell has been relaying this message for a while now.
This past week two other Federal Reserve members expressed a similar sentiment as Powell, further driving home the message to expect high-interest rates to persist.
Loretta Mester, Cleveland Federal Reserve President,expects interest rates to rise notably higherbefore the central bank can ease them. She sees benchmark rates rising above 4%, higher than the current range of 2.25%-2.5%.
My current view is that it will be necessary to move the fed funds rate up to somewhat above 4 percent by early next year and hold it there… I do not anticipate the Fed cutting the fed funds rate target next year.
— Loretta Mester
In addition to higher rates, she expects them to stay elevated and not be reduced in 2023 — contrary to what most market experts were assuming.
Another Federal Reserve President shared similar thoughts. New York Fed President John Williams expects interest rates to continue climbing higher and to remain at those levels. He did not provide a specific number but expects real interest rates to be positive.
I do think with demand far exceeding supply, we do need to get real interest rates … above zero.
We need to have somewhat restrictive policy to slow demand, and we’re not there yet…We’re going to need to have restrictive policy for some time.
— John Williams
Why do members of the Federal Reserve want to see higher interest rates for an extended period? To control thehigh inflation we currently have.
Why There Is Skepticism Towards Their Sentiment
The Federal Reserve may be one of the world’s most powerful and educated organizations, but at the end of the day, the members are all humans. And we are all flawed in our forecasts.
There is currently skepticism towards Powell’s statement. It’s hard for people to believe him and his forecast when less than a year ago, he was proclaiming therising inflation to be “transitory.” That was clearly incorrect and has required businesses, governments, and individuals to shift approaches towards money.
Unfortunately, Federal Reserve members have also been incorrect in the past. Some members were late to acknowledge the existence of bubbles during the dot-com era and housing crisis.
The Fed also has to shift its approach based on the latest data. So its policy will inevitably be different four months from now as the economy changes. As a result, coupled with the incorrect forecasts last year, it’s hard to have faith in what we should expect for 2023.
Final Thoughts
The pandemic created uncharted territories for all to navigate — and the Federal Reserve is no different. Their policy approach had to be altered entirely. But now, their decisions have put them in a mess.
High inflation is crippling many Americans. The idea of a “soft landing” has essentially been given up on. Powell has said the Fed’s number one goal is controlling inflation, even if that leads to a recession.
We may soon see how serious he is about that statement. Either way, expect interest rates to continue to rise in 2022 — the next Federal Reserve meeting is September 21st — and at least for the beginning of 2023, rates won’t be reduced.
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