The Fed Has A Lot Of Catching Up To Do

The Fed Has A Lot Of Catching Up To Do
Theodora Lee Joseph, CFA

over 1 year ago1 min

The US has been one of the quickest developed economies to hike interest rates, but a glance at history suggests the Federal Reserve might have a long way to go yet.

The chart above shows that the inflation rate (measured by the US consumer price index, light blue line) and interest rate hikes (dark blue line) have risen and fallen at much the same pace in the last 60 years. The only gaps that exist between the two almost always appear when rates overshoot inflation. Now, though, inflation is outpacing interest rates by quite some way.

That suggests you should expect the Fed to double down on their rate hikes, and at the most aggressive pace than we’ve seen since the 1970s. That doesn’t bode well for stocks and bonds, so it might be best to stand on the sidelines if you were thinking of buying the dip. It’ll also mean big risks to the US real estate market, as higher interest rates increase the cost of home ownership. You should, however, hold on tight to the US dollar: higher interest rates increase investor demand for a country’s currency, so you can expect the dollar to go from strength to strength.

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