Interest Rates - Higher for Longer

“Good afternoon. My colleagues and I are strongly committed to bringing inflation back down to our 2 percent (annual) goal. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”

Fed Chief Powell’s opening statement set the tone for his Wednesday press conference. It was Powell on steroids.

It isn’t simply rhetoric. The Federal Reserve boosted the fed funds rate by 75 basis points (bp, 1 bp = 0.01%) to 3.00-3.25%. It’s the third-straight 75 bp rate hike.

It’s the fastest series of rate hikes since 1980, when the Fed jacked up the fed funds rate by an astounding 1,000 bp in six months (to nearly 20%), according to St. Louis Federal Reserve data.

Though Powell opened the door to an eventual slowdown in the pace of rate increases, the June forecast of a year-end fed funds rate of 3.4% was lifted to 4.4% (red line), and to 4.6% from 3.8% by the end of 2023. It’s not simply the level, but it tilts in an even more hawkish direction.

What is the Fed trying to accomplish?

By raising interest rates, it wants to slow demand in the economy and bring it back in line with supply, which historically has slowed inflation.

In addition, a weaker economy reduces the number of job openings and boosts layoffs, which limits inflationary wage hikes. It’s not without pain and may create risks in the financial sector.

Powell was explicit in his desire to slow the economy. In fact, the Fed is forecasting a rise in the unemployment rate to 4.4% by the end of 2023, up from 3.7% today (U.S. Bureau of Labor Statistics). But let’s not put too much stock in Fed forecasts.

It failed to call the sharp upturn in the economy following the lockdowns, it missed badly last year on its outlook for inflation, and last year’s projection of just one increase in the fed funds rate in 2022 is an embarrassment.

Final thoughts

Price stability is the bedrock of a healthy economy. For starters, the economic expansion of the 1990s and the 2010s, the longest expansions on record per the National Bureau of Economic Research (data pre-dates the Civil War), was assisted by low inflation.

And inflation eats away at savings.

The Fed’s desire to bring inflation down signals rates could stay higher for longer, and it will depend on how long it takes to get a handle on inflation.

If you have questions or would like to discuss any other matters, please let me know.

Clark S. Bellin, CIMA®, CPWA®, CEPA

President & Financial Advisor, Bellwether Wealth

402-476-8844 cbellin@bellww.com

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