Federal funds rate also rises
The Federal Reserve's decision to cut the federal funds rate by 0.5 percentage points More significant increases in long-term rate estimates.
of Economic forecast summary In forecasts released last week to coincide with the Fed's rate cut, the median forecast for the longer-term federal funds rate rose to 2.9%, the third increase this year and one increase each time the forecast was released. The forecast was at its highest level since September 2018.
This means that Fed officials have revised upward their expectations of where monetary policy will set banks' overnight lending rates to achieve their 2% inflation target. In other words, they are now Achieving 2% inflation sustainably would require higher interest rates.
This marks a major change in thinking from Fed officials. The rate remained almost unchanged The forecast has been in place since it first hit 2.5% in June 2019 and will continue through December 2023. There were months when it dropped to as low as 2.4%, but it quickly bounced back to the baseline. The stability of this forecast, which has lasted 54 months, is unprecedented. Since the Fed began releasing forecasts for the federal funds rate in 2012, the previous record for a period of no change in the forecast was seven months from September 2012 to March 2013.
What went down is now rising
The Fed's consistency in raising rates tells us that much: It stopped and started hiking for most of the period from 2012 through 2019, when the Fed was lowering its estimates for the long-term federal funds rate. But now, Fed officials are Increase the median estimate per meeting The rise is expected to continue this year and there is every reason to suspect it will rise again when the next forecast is released in December.
To understand what this means, it's important to remember that the Fed treats its 2% inflation target as: A fixed point in a changing economyThe Fed adjusts the federal funds rate and the unemployment rate to what it believes is necessary to achieve its 2% inflation goal. The median forecast for the long-run unemployment rate has been as high as 5% and as low as 4%. It is currently at 4.2%.
Estimates of real gross domestic product (GDP) growth have not changed much, hovering around 1.8% since 2016, but rose to 1.9% in the latter part of the Trump administration. (The increase was driven by the Tax cuts and tariffs failed to stimulate inflation This was something many had predicted, and it solidified in officials' minds that the U.S. might grow a little faster than they thought.
What we've seen this year is a steady increase in expected federal funds rates and a smaller expected increase in the unemployment rate. The Fed now sees higher non-inflationary interest rates and higher non-inflationary unemployment rates..
Quiet criticism of Biden-Harris economic policies
This is bad news for the American consumer and a subtle criticism of the Biden-Harris economy: after four years of a Democratic administration, the Fed is convinced Americans are going to suffer. Job losses and rising interest rates They raised interest rates just to control inflation.
Why focus on long-term interest rates rather than current interest rates? As we've said before, expectations of long-term interest rates have a bigger impact on investment and growth than current interest rates. Companies make decisions about whether to fund new projects based on current interest rates. Expected interest rates over the life of the project Rather, a higher interest rate than is currently available is desirable. This is especially true if current interest rates are higher than long-term expectations because the company expects it will be able to refinance at a lower rate.
What this means is that the Fed has eased monetary policy in terms of the current federal funds rate, but tightened it in terms of expectations.
