How far will the Fed’s rate hikes go before they back off? Here’s what economists predict

The Federal Reserve has had a historic tear this year, struggling to suppress persistent record high inflation with a series of aggressive rate hikes that have pushed the monetary body’s benchmark interbank lending rate up at the fastest rate since 1982.

The strategy, which has included six rate hikes so far this year, aims to stifle the burning US economy by raising the price of debt, which, in theory, puts downward pressure on government spending. consumption and overall economic activity in the so-called “demand destruction”.

The pressure on interest rates is surely showing its effects in some areas, stifling the US housing market by pushing mortgage rates north of 7% – more than double what they were a year ago – and fueling the highest credit card interest rates in nearly three decades. But the most significant targets for the Fed when it comes to assessing the effectiveness of its policy, consumer spending and the labor market, have so far remained resilient in the face of more expensive debt.

So how far will the Federal Reserve have to go before declaring victory on inflation and giving up its blitz on interest rates?

As some signs of easing appear in the Labor Department’s October inflation report, economists are looking at when the Fed will reach its terminal rate, the maximum rate at which the Fed is canceling the stimulus cycle and begins to consider taking things the other way.

Why does the Fed keep raising rates?

Following its two-day meeting on Nov. 2, the Federal Reserve announced another whopping 0.75% increase in its benchmark lending rate, marking the fourth consecutive increase of this magnitude and the sixth overall increase in interest rate this year.

At a press conference after the announcement of the latest rate hike, Fed Chairman Jerome Powell said that at some point it would be appropriate to slow down the rate of interest rate hikes. interest rate, but “we still have some way to go” and did not signal whether the next interest rate increase, due in December, would be a continuation of the 0.75% increases or a lower increase.

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

But how long exactly is “some time”?

When will rising interest rates finally end?

Just a week after Powell’s missive, the Labor Department announced that US inflation was 7.7% in October. While this is still a high number that sits near 40-year highs, it is the lowest year-over-year rate since January.

Now economists assume the Fed’s interest rate will stop in the spring of 2023, but not before the benchmark rate, now in a range of 3.75% to 4.0%, peaks north by 5%.

In a Nov. 10 analysis, Wells Fargo economists offered a handicap to the Fed’s near-term plans, noting the particular resilience of consumer spending, an anomaly that was supported by still-solvent reserves of record US savings. households that have been buoyed by a healthy influx of stimulus checks and spending habits stifled by pandemic restrictions.

“In the last half-century, the only other times the Federal Open Market Committee raised rates faster was in the late 1970s and early 1980s, when then-Chairman Paul Volker, notoriously ‘broke inflation’s back’, wrote economists at Wells Fargo. “Fast forward to today and core inflation continues to remain very high, even in the face of the measures already taken.

“For the FOMC, the resilience of demand increases the pressure to continue raising rates. We expect the committee to increase rates by 50 (basis percentage points) at each of its next meetings in December and February before returning to an increase of 25 (basis percentage points) at its March meeting. This would put the top of the target range for the federal funds rate at 5.25% in March, where we expect it to hold for the remainder of 2023.”

A Reuters poll in late October found similar sentiment among a group of US economists, most of whom predicted the terminal rate would be reached early next year.

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