To Tame Inflation, History Suggests The Fed May Need To Hike Rates Significantly

To Tame Inflation, History Suggests The Fed May Need To Hike Rates Significantly
Andrew Rummer

about 2 years ago1 min

History suggests the Federal Reserve (the Fed) may need to increase interest rates much more than the market currently expects if it wants to tame the fastest inflation in nearly 40 years

The chart plots the US consumer price inflation rate (in blue) on the same scale as the Fed’s benchmark interest rate (in pink). The green circles show how, from the 1970s to the 2000s, the US central bank was alway forced to raise the interest rate above the inflation rate before consumer prices started falling back. 

With the Fed forecast to start lifting interest rates next year, market indicators suggest investors expect its key rate to peak at about 2% before it starts cutting once again. With US inflation currently approaching 7%, this so-called terminal rate seems remarkably low by historical standards. 

Investors are clearly betting the deflationary environment that has held sway since the 2008 financial crisis will continue, and the spike in US inflation will pass as Covid-related supply chain disruption clears. But if those expectations prove overly optimistic, don’t be too surprised if the Fed is forced to hike rates well above the 2% that’s currently priced in – with spillover into stocks, bonds, and other investments the world over.



All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG