How far will the Fed raise interest rates before they stop?

The Fed has been on a historic tear this yearstruggling to quell persistent record inflation with a series of aggressive interest rate hikes that boosted the monetary authority’s benchmark interbank lending rate at the fastest pace since 1982.

The strategy, which has so far included six rate hikes this year, aims to cool the inflamed US economy by increasing the price of debt, which, in theory, puts downward pressure on consumer spending and overall economic activity in what is called a “destruction call.”

Interest rate pressure is certainly showing its effects in some areas, Choking the US housing market by pushing mortgage rates north of 7% – More than double what they were a year ago – And fueling the highest interest rates on credit cards in nearly three decades. But the Fed’s most important targets when it comes to measuring its policy effectiveness, consumer spending and the labor market, have so far remained resilient in the face of higher-rate debt.

So how far will the Fed need to go before it declares victory over inflation and stops launching an interest rate campaign?

With some signs of backing off The October inflation report released by the Department of LaborEconomists study when the Fed will reach its final interest rate, which is the peak rate at which the Fed unwinds from its consolidation cycle and begins to consider taking things the other way.

Why is the Fed still raising interest rates?

At the conclusion of its two-day meeting on November 2, The Federal Reserve announced a massive 75% increase in the benchmark lending ratemarking the fourth consecutive increase of this magnitude and the sixth increase in the overall interest rate this year.

In a press conference following the announcement of the latest rate hike, Fed Chairman Jerome Powell said that at some point it would be appropriate to slow rate increases but that “we still have some ways to go” and did not indicate whether the next rate hike, expected In December, it will be a continuation of the 0.75% increases or a smaller increase.

“Restoring price stability will require maintaining a restrictive stance on policy for some time,” Powell said.

But what exactly is “some time”?

When will the interest rate hike finally end?

Just a week after Powell’s mistake, the Labor Department reported that US inflation came in at 7.7% in October. While it’s still a huge number hovering near 40-year highs, it’s the lowest annual rate since January.

Now, economists are speculating that the Fed’s rapid rate will stall in the spring of 2023, but not before the benchmark rate, now between 3.75% and 4.0%, has peaked north of 5%.

In the November 10 analysisEconomists at Wells Fargo presented a drag on the Fed’s near-term plans, pointing to the particular resilience in consumer spending, an anomaly that was buoyed by still-solvable reserves of record-high household savings that were buoyed by a healthy flow of stimulus checks and stifled spending habits. Pandemic restrictions.

“In the past half century,” economists at Wells Fargo wrote, “the only other times the FOMC raised rates faster was in the late 1970s and early 1980s when then-Chairman Paul Volcker famously ‘broke the back of inflation.’” Fast-forward to Today core inflation is still very high, even in the face of the measures already taken.

For the FOMC, the elasticity of demand adds pressure to continue raising interest rates. We expect the committee to raise interest rates by 50 (base percentage points) at each of its upcoming meetings in December and February before tapering back to 25 (base percentage points) at its meeting in March. That would put the upper end of the target range for the federal funds rate at 5.25% in March, where we expect it to remain through 2023.”

A Reuters poll was conducted in late October. I found the same sentiment among a group of US economists, most of whom predicted that the final interest rate would be reached early next year.

A strong 74% majority, 23 of 31, expect the Fed’s final interest rate to be reached by the end of the first quarter of 2023, while six said in the second quarter and two economists chose the fourth quarter of next year.

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