The Fed’s March Upward

The FOMC raises its terminal target rate forecast again—to 4.6%

WSJ editorial. 

"The Federal Reserve’s release of its latest economic thinking on Wednesday continued what you might call its gradual climb to meet inflation reality. It has taken far too long, but the central bankers are getting closer to the degree of monetary tightening required to get inflation down.

The Federal Open Market Committee raised its target fed-funds rate another 75 basis points to between 3% and 3.25%. That’s the third 75-point hike in a row. More significant is the forward guidance in its median economic projections that rates could rise another 125 basis points this year and higher than that in 2023. This suggests a so-called terminal rate during this tightening cycle that is higher than 4.5% and could be 5% next year.

While the pace of rate increases has been fast in recent months, the story of the last year is how long it took the Fed to act. The median Fed projection for its target rate for 2022 has climbed from 0.9% last December to 1.9% in March, 3.4% in June and now 4.4%. That march upward reflects the Fed’s historic misjudgment in how high inflation would increase and how persistent it would turn out to be.

One cost of delay will be slower economic growth as the Fed must tighten more than it otherwise would have. The median forecast of board members and bank presidents for economic growth this year is now a mere 0.2%, down from 1.7% in June, 2.8% in March—and 4% last December if you can believe they believed that only nine months ago. The GDP growth forecast for next year is a still meager 1.2%. In short, we’re in for stagflation.

Even this might be optimistic if you consider Milton Friedman’s admonition that monetary policy operates with long and variable lags. This means today’s tightening might not have its greatest impact until the end of 2023 or into 2024. Equity markets voted with the pessimists Wednesday as they sold off late, and bond yields retreated from intraday highs.

Rumors of looming recession are everywhere, but the Fed still has inflation falling rapidly in 2023 and unemployment rising only modestly to a high of 4.4% from 3.7% today. That’s about as soft a landing as anyone could expect. It assumes there are no financial surprises along the way, which there always are as rising rates trip up the over-leveraged.

Chairman Jerome Powell would no doubt count this Fed forecast as a victory if he can pull it off. Given the deep inflationary hole we’re in, and the lack of any pro-growth policies from the Biden Administration or Congress, it’s probably the best we can hope for."