Interest rates are ‘likely to be higher’ than previously anticipated
The Fed, Interest Rates and Your Money
Federal Reserve Chairman Jerome Powell yesterday cautioned that interest rates are likely to head higher than what central bank policy makers had been expecting them to.
Recent economic data has come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.
If the totality of the data were to indicate that faster tightening is warranted, the Fed is prepared to increase the pace of rate hikes.
The above thought process carries two implications:
One, that the peak, or terminal, level of the federal funds rate is likely to be higher than the previous indication from the Fed officials.
Two, that the switch last month to a smaller quarter-percentage point increase could be short-lived if inflation data continue to run hot.
Powell made it clear that the current trend shows that the Fed’s inflation-fighting job is far from over, stating the follow:
“We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do”.
The Fed has raised its benchmark fund rate eight times over the past year to its current targeted level between 4.5% – 4.75%.
On its face, the funds rate sets what banks charge each other for overnight lending.
But it feeds through to a multitude of other consumer debt products such as: home mortgages, auto loans and credit cards.
Restoring price stability will likely require that the Fed maintains a restrictive stance of monetary policy for some time.
Powell noted some progress on inflation for areas such as residential housing.
Powell also reiterated that rate decisions will be made on a “meeting by meeting” basis and will be dependent on data and their impact on inflation and economic activity, rather than on a pre-set rate hike course.
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