Fed funds rate predictions


**Fed Raises Interest Rates by 0.75 Percentage Point for Third Straight Meeting**
**Officials project short-term rates will rise above 4.25% by year’s end, signal further large increases at coming meetings**
**By Nick Timiraos, The Wall Street Journal, Sept. 21, 2022**

**...The decision Wednesday—unanimously supported by the Fed’s 12-member rate-setting committee—will lift its benchmark federal-funds rate to a range between 3% and 3.25%, a level last seen in early 2008.**

**Most of the 19 officials who participated at the Fed’s policy meeting expect to lift the rate at least by another 1.25 percentage point by December, to a range between 4.25% and 4.5%, according to their new projections, released Wednesday. The Fed has two more meetings this year.**

**Officials’ projections show greater uncertainty over what might happen to rates after that. Around one third of officials expect rates to stay above 4% through 2024, and another third see the Fed cutting rates to between 2.5% and 3.5% in 2024. The remaining third have rates declining to somewhere in between...**

**The Fed is passively reducing its $8.8 trillion asset portfolio by up to $95 billion a month as those securities mature....** [end quote]

As long as the fed funds rate is below the inflation rate, the real yield is negative and lenders are paying borrowers to borrow money. That’s stimulative, which increases inflation. The Fed is targeting a neutral rate that doesn’t stimulate or slow the economy.

The Fed is hoping that so-called core PCE inflation, which excludes volatile food and energy prices, will decline to 4.5% by the end of this year. If the fed funds rate is raised to 4.5% that would be neutral.

It’s clear that inflation did not fall this summer and actually rose by some measures.

The Fed will definitely hold the higher fed funds rate until they are sure that inflation is controlled and stable for months.

The stock market fell even though everyone expeced the 0.75% fed funds rise.


**Powell Doesn’t Have to Go Full Volcker for Stocks to Drop**
**Investors seem too complacent as the Fed keeps signaling its hawkish intentions**

Since the 2000 Greenspan put, a whole generation of stock traders expects the Fed to slash real rates to zero or below at the first sign of market weakness.

A whole generation of stock traders wailing, “Say it isn’t so!”


The market is still a long way from believing that it IS so. I figure that revulsion is probably months away.

Keep watching the VIX, NH-NL and Financial Stress Index. The time will come. In 2008, when Bernanke raised the fed funds rate to 5%, the financial crisis ensued. But inflation was only 2% at that time, so the real fed funds yield was the historic average of 2.5%. Today’s Fed only wants a real fed funds yield of 0% so the market will scream but probably no crisis, only an ordinary recession.