For the first time this cycle, major media outlets began to report last week on major Wall St analysts projecting the Federal Reserve will raise Fed Funds higher than 6%.
Until now, predictions that high were exclusively “the stuff” of the occasional guest economist on talk shows. Now, that view is becoming more mainstream. It is the prediction made by BofA Global research in a press release last week and the press release got substantial coverage.
It ain’t a whacky right-wing prediction anymore.
Current Data:
Jan CPI…6.1% (SA, annualized)
Jan PCE…7.4% (SA, annualized)
Fed Funds … 4.75% (Feb 28)
Forbes magazine describes a 6% Fed Funds Rate as “potential nightmare for stock prices as borrowing costs slash into profits,” and added
. . . stocks could get another kick in the teeth as experts keep raising their long-term expectations for interest rates, already hovering at a 16-year high: Bank of America economist Aditya Bhave said Tuesday the Fed “might have to raise rates closer to 6% to get inflation back” to about 2% year-over-year, predicting a far higher peak federal funds rate this year than priced in by the market.
In a Jan 10 interview JPMorgan CEO Jamie Diamond mentioned that 6% might be a possibility. but such rates would seem extreme compared to the recent past and Diamond cautioned “. . . Fed officials should move rates to 5% and then pause . . . . I don’t think there’s any harm done by waiting three to six months to see what the full effect this is around the world,”
Five of the last five quarters the Federal Reserve Board has revised its all-important quarterly “Summary of Economic Projections” (source of the famous "dot plot). Each time they needed to move it a little more to the right. Each time they predicted inflation will be relatively low and will be contained by an even lower Fed Funds rate.
If Bank of America (and Jamie Diamond, and Larry Kudlow and Art Laffer etc.) are correct, the Fed will need to adjust it again . . . again they were too far to the left.
The Fed’s last summary, (December 14, 2022) predicts in 2023
the Fed funds rate will average 5.125%
and that will contain our 7.4% PCE inflation.
Conventional, old -school analysis says:
“We don’t have a lot of data to go on. Inflation has almost never been this high, but in 2002, but CPI was 6.4% in 2022, so you’re gonna have to raise interest rates above 6.4%.”
But Bernanke, Yellen and Powell all come from the Keynesian left and they say:
“We are rolling-off the balance sheet and we have stopped buying MBS so we won’t need to raise it so high.”
I’m gonna stick with the old school on this one.
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This chart show the 2000-2022 difference between 30-Year mortgage rates and the Fed Fed Funds rate.
I added the green line at 3% and looking at the chart we can see that
it varies, but 30-year mortgages are almost always 3-5% higher than the Fed Funds rate.
If that’s true (and it sure looks like it) then we can predict a Fed funds rate of over 6% means 30-year mortgage will go to at least 9-11%
Minneapolis Fed President Neel Kashkari said in December, he jotted down raising interest rates up to 5.4% and holding rates at that level for an extended period. . . .
Elsewhere, Atlanta Fed President Raphael Bostic said Wednesday he believes the Fed needs to raise its policy rate by 50 basis points, to a range of 5%-5.25%, and hold it at that level until well into 2024.
This is exactly precisely what happens when everyone on the FOMC has the same mindset. What’s the point of having a multi-person board if they are all clones of each other?
