Here we are, the Fed has raised the Fed Funds Rate by 3% at a near record pace. By all measures and rhetoric, they appear steadfast in their resolve to fight inflation – and interest rates are their sharp knife.
Their plan is to raise interest rates to slow demand for goods and services. Attack the demand side of the inflation equation and let supply issues resolve themselves.
Are we in the dark here? Are we just supposed to sit by idly until the Fed provides us with more granularity of what to expect? Believe it or not, the Fed has a plan. After all, there are over 400 PhDs and economists at the Fed. While it is popular to bash the Fed – although don’t fight the Fed – they might know a thing or two about what is going on.
Federal Reserve Bank Paths
Red lines show 68% probability coverage intervals. Blue lines are forecast. Black lines are history.
Details to consider
- The above guidance implies that inflation should already be on approach to decline.
- The Fed is expected to raise the Fed Funds Rate at the next meeting. The expected increase is 0.75%.
- The peak Fed Funds Rate according to the chart is expected to be approximately 3.5%. With the intended rate increase, that will result in the Fed Funds Rate being closer to 4%.
- Consensus of economists’ estimates call for a terminal Fed Funds Rate that is closer to 5%.
- I have stated before that the Fed has to put the Fed Funds Rate above inflation. According to these paths, it looks like the Fed is expecting inflation and the Fed Funds Rate to cross somewhere above 4%.
- It goes without saying, the future is unknown.
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Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
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